HTMG3523

Introduction to Real Estate Investment

Lecture 1: Introduction to Real Estate Investment and Development

About Me
• Yang YANG (Zoe), 楊揚
• Assistant Professor of Real Estate, CUHK, 2018 - present
- B.Comm in Finance and Real Estate at the University of British Columbia, 2012
- M.Sc. in Urban Land Economics at the University of British Columbia, 2014
- Ph.D. in Real Estate at the National University of Singapore, 2018

• Research interests
- Real Estate Finance and Economics
- Housing market dynamics, real estate development, green building, household consumption,
behavioral finance, financial intermediary
- Industrial Organization
- Competition, service quality, firm performance
- Urban Economics, Transportation, Environment
- Air pollution, human mobility, transportation, health

• Real estate investment experience

2
How to reach me

• Every Tuesday 13:15-14:15

• Or By Appointment:
Email: [email protected]
Phone: 3943-4033 (office)

• Reach our TA:

• Amy Xu
• Email: [email protected]

3
Course
Schedule
Individual Assignment due:
29 Oct 2024, 11:59 pm

Group project due:

10 Dec 2024, 11:59 pm

Exam:
3 Dec 2024, in class
 Individual
assignments
(20%)

Group project • Presentation (10%)

How to evaluate (30%) • Group report (20%)

your
performance Exam and quiz
(30%)
• Exam (20%)
• Quiz (10%)

Attendance and • Attending class (5%)

Participation • Group discussion raising questions,
(10%) providing feedback (5%)

5
Important Issues

Please strictly follow the deadlines Academic Integrity (strictly

for submitting your assignment. enforced!)
1 Point (out of 25 points) deduction for each late The VeriGuide receipt should be attached to the
submission on the due date group project
2 Point deduction for each additional day
No exemptions without special approvals (e.g.
medical reasons).

6
Agenda

1. Course syllabus
• Course objective
• Materials
• Assignment and course project
• Assessment
• Miscellaneous

2. Introduction to real estate investment and development

a) Major types of capital asset markets and investment products
b) Major investment objectives and constraints
c) Commercial real estate product types
d) Intro to commercial real estate leases

7
 SPACE MARKET
LOCAL
SUPPLY DEMAND &
ADDS (Landlords) (Tenants) NATIONAL
NEW ECONOMY

RENTS
&
OCCUPANCY FORECAST
FUTURE

DEVELOPMENT
INDUSTRY
ASSET MARKET
IF IS SUPPLY
YES DEVELPT CASH
(Owners
PROFITABLE FLOW
Selling) CAPI
?
TAL
PROPERTY MKT MKTS
consfoccl =
G CONSTR MARKET REQ’D
DEMAND
COST VALUE CAP
(Investors
INCLU RATE
Buying)
LAND

= Causal flows.
REAL ESTATE INVESTMENT
rale Rent
cap
=

8
Prie
一
Learning objectives of this Course

• Understand:
The real estate investment concepts and theories
The nature of return and risk quantification and characteristics of property
development and investment
The theory and mechanics of real estate feasibility studies
The origin, evolution, industry landscape and growth of REITs

• Able to:
Construct real estate financial modeling

9
 Major Types of Capital Asset
Markets and Investment Products

Public Markets: Private Markets:

Equity Assets: Stocks Real Property
REITs Private firms
Mutual funds Oil & Gas Partnerships
ETFs Hedge Funds
Debt Assets: Bonds Bank loans
MBS Whole Mortgages
Money instruments Venture Debt
LBOs
10
 • Public markets:
Capital • Small homogenous shares of ownership in
Markets - assets trade in public exchange
• Price quotes available for all to observe
Public • Buyers and sellers are simultaneously
Markets participating in the market sell
- fastly
• High degree of liquidity: able to sell units of
assets at or near the last quoted price
• Information efficiency: price can adjust
rapidly to relevant news about their value
• Examples: the stock market, bonds market,
mortgage back securities
抵押
 • Private markets:
• Assets are traded in private transactions arranged between
individual buyers and sellers
Capital • Buyers and sellers found each other through brokers
Markets - • Whole assets can be traded in a single transaction (e.g., a
company, property, oil well, mortgage, etc.)
Private • Examples: real estate transactions, loans, hedge funds
• Less liquid than public market
Markets • Larger transaction value in general
• Take longer for sellers to find buyers
• More difficult to ascertain a fair price for a give whole asset
• Larger transaction costs (e.g., % of asset value), high information
costs
• Traded less frequently than publicly traded assets
• More difficult to observe the price traded
• Unique
• Incorporate news and information slower
• Example: valuation of a housing unit
 bank ollect cach fum
• Debt assets g .

bolrowe
• The rights to the future cash flow to be paid
Capital out by borrowers on loans they have taken
Markets - out
• Give owners a senior or preferred claim for
Debt Assets obtaining the cash which the underlying
assets can generate
• Payment amount and time based on the
contract
30 yecs
• Less risky than equity assets
有限 比
.

• Have specified “maturity”: finite lifetimes

after which there will be no further cash flow
• Examples: interest payments of a bond
一
 9 .

shoppnf nell need bMon 1

nvestnat
1

Me =
0 ,
EGufy partnr
3 B =

= Debt pcctua
• Equity assets Bak=
0 OB .

ou
(
= 0 7
B = ESulty pectnr
. 1

Capital • Give owners the residual or subordinated

claim for obtaining the cash which the
Markets - underlying assets can generate
Equity Assets • Residual: amount that is left over after senior
claims
• More risky than debt assets
• Able to benefit from growth or upside
potential in the cash flows generated
mello 18 B • Usually infinite-lived: owners of an equity
If
asset must sell the asset to liquidate their
Me = 0 .
9B
0 6 B
holding
Bank
.
=

You = 0 . 3B
一
Major Investment
Objectives
• Two different and mutually exclusive types
of investment objectives:

1). The growth 2). The income

(or saving) (or current cash
objective flow) objective

- No immediate - Ongoing need

need to use the to use cash
cash being generated from
invested the investment

- Long time - Short time

horizon horizon

CUHK Business School

School of Hotel and Tourism Management

15
Major Constraints and Concerns
• The possibility that future investment performance may vary over time in a manner that is not
Risk entirely predictable at the time when the investment is made.

• The ability to sell and buy investment assets quickly at full value and without much affecting the
Liquidity price of the assets.

Time horizon • The future time over which the investors’ objectives, constraints, and concerns are relevant.

Investor Expertise
and management • How much ability and desire has to manage the investment process and the investment assets.
burden

Size • How big the investor is in terms of the amount of capital in need of investment.

• Whether the investor faces an absolute constraint on the amount of capital they have available
Capital constraint to invest, or can obtain additional capital relatively easily if good investment opportunities are
available.

CUHK Business School

School of Hotel and Tourism Management
16
Investors are heterogeneous
Individual investors Institutional investors

- Different constituencies (life insurance companies,

- Different personal goals pension funds, mutual funds, banks, and foundations)
- Different life styles - Different liabilities
- Different points in life cycle - Different level of expertise
- Different amounts of wealth and earned income - Different types of regulations and legal constraints:
• A variety of different investment products
• Investment industry
• A market for investment products
CUHK Business School
School of Hotel and Tourism Management
17
 Retail

Office

Multifamily
1. Product
Type Industrial

Hotel

Specialty Product
 1.1 Retail Overview 1

9 spanalet
Apple
.

-
• One or more anchor tenants (“big box”
tenants) oBissa
• Several in-line tenants (smaller tenants)
• May have retail pads (standalone
buildings outside of the shopping
center) 退此款setomell
• Expense reimbursement structures
(property taxes, insurances, repairs…)
• Long-term (3 to 10+ years) leases
• Several different types
一
• Strip centers ① • Power Centers ③
• 1000-10000 sf • 30,000 - 200,000 sf
• Open-air shopping • Category dominant
center anchors (Walmart,
• Stores arranged in a Home Deport...)
row • Discount department
• No enclosed stores
walkways • Wholesale clubs
• Straight-line, L or U • Few small tenants
shape

② • Regional Malls④
• Neighborhood Shopping • 400,000 - 2,000,000
Centers sf
• 30,000 – 125,000 sf • General Merchandise
• Apparel, soft goods, • Fashion
restaurants, grocery
• Typically enclosed
stores
• Food courts
• Box, U or L shape
• Dying regional
malls….
1.2. Office Overview

• Multi-story office buildings

• floor plates
• Some expense
reimbursements
• not as much as retail
properties
• Long-term (3 to 10+ years)
leases
• Several different types
• CBD Office Space • High-rise Office
• Central Business • 10,000 – 25,000
District sf floor plates
• High density • Located in CBD
office • Class A
development
• 6- 40 stories
• Often
downtown or
city center

• Suburban Office
Buildings • Creative Office Space
• 80,000 – • Varying floor
400,000 sf plates sizes and
• Mid-rise square footage
structures • Engaging,
• 20,000 – 50,000 amenitized work
sf floor plates environment to
attract top
• Campus-life tenant
office building • WeWork
aseemblage
 1.3. Multi-family Overview
• Made up of units and common areas
• Most operating expenses not reimbursed
• Utilities if units are not separately
metered
• RUBS
• Generally short-term leases (6 – 18
months)
• More frequent fluctuations in
revenue as market rents change
• Several different types
• Garden-style Apartments • Mid-rise Apartments • High-rise apartments
• 2-4 story wood frame • 5 – 9 stories • 10+ stories
construction • Steel frame • Steel frame construction
• 50 -500 + units • Urban Infill • Urban infill
• Suburban Communities • 50– 200 Units • 15—500+ units
• Lifestyle Amenities (pool, gym, • In North America context,
business center, dog parks…) usually class A buildings
1.4. Industrial
Property Overview
• Made up of one or more warehouse
buildings
• Operating expenses often reimbursed by
tenants
• Generally long term leases (3-10+ years)
• Often ”build-to-suit”
• Several different types
• Heavy Manufacturing
• Specific purpose
• Intend to make heavy-duty
goods and materials
• Light Assembly
• Warehouse, office space,
product assembly space
• Bulk Warehouse
• 100,000 – 1,000,000 sf
• Serve as shipping hubs
• Increase popularity with E-
commerce
• Amazon
• Flex Space
• Industrial use
• Can be easily converted to
office
1.5. Hotel Properties
Overview

• Made up of common areas and units

• Units often referred to as “keys”
• Price/key
• Operating expense not directly reimbursed
• Landlord is responsible for all operating
expenses
• Very short-term tenant base (<1 week)
• Exception: corporate, long-term stay
• Several different types of hotels
 9 Hyaft
.

• Full Service Hotel

• Room service
• Restaurants
• Convention halls
• Retail
• Wellness services (spa,
gym…)
es . Aiubub
• Limited Service Hotels
)• Small, boutique properties
(xhheakfest
• Limited service offered
• Airbnb
• Extended Stay V Stcy longe
• Large rooms
• Longer-term travellers
• Suite-like accommodations
• Limited services
• Corporate-traveler friendly
1.6. Specialty Product
Types in CRE

• Medical Office Buildings

• Senior Living Communities
• Student Housing
• Mobile Home Parks
• Self storage properties
• Medical Office Buildings
• Made up of suites and common areas
• Intended for medical, dental, psychiatric treatment of
patients
• Outpatient care, labs…
• Specific standards for electricity, plumbing, HVAC…

• Senior Living Communities

• Short-term leases
• Independent living to full-time care
• Nursing home (with skilled nursing facilities)
• 24-hour service and rehabilitation care
• Assistance needed for all or most of daily
living
• Assisted living
• 24-hour on-site staff
• Health related care
• Independent living
• Service and programs offered
• Little or no assistant needed
• Student Housing tenant bases
• Short-term leases (9- • Costly moving
10 months) expenses
• Seasonal leasing • Few operating
periods expenses
• Rented by room or bed • Minimally
• Amenity rich (pools, management intensive
gym, study areas…)
padenic 反 多 choose
• Generally higher
maintenance costs

8
• Self-storage
• Made up of units
• Short-term leases
• Mobile Home Parks • Counter-cyclical
• Generally rent by lot • Low turnover costs
• Landlord doesn't‘ own • Very little
mobile homes maintenance cost
• Water, sewer, electric • Minimally
services available management intensive
(billed to tenants)
• Long-term, sticky
而
人
 2. The Development
Process

• Development process:
• Pre-development:
planning & negotiation &
approval
• Development: design &
engineering &
construction
• Marketing: marketing &
sales

Video link
Key attributes of real estate development
 Structure:
diversified, decentralized, and constant changing
 Nature:
high risk, opportunity oriented, entrepreneurial, financially levered, a business cycle follower
 Developer:
a creator, promoter, negotiator, manager, leader, and investor
 Process:
multi-disciplinary, multi-stages, creative and disciplined
 Orientation:
adjust to demands, competitor strategies, public policy, citizen concerns, and local, national, and
global economies
33
Types of development and planning studies

1. Strategy
2. Market
3. Merchandising
4. Legal
5. Physical design
6. Compatibility
7. Economic/Financial: our focus ***
 Economic modelling, capital budgets, present value and discounted cash flow forecasts,
rate of return analysis, financial packages, feasibility studies, and appraisals

34
The marriage of Finance and Real Estate
• Financiers are attracted to real estate lending because:
o Development projects require sizable amounts of money
o Developers often have limited equity
o Land is durable and secure form of investment
o Improvements on land are long-term, adding to the security of real estate
o Lenders want to lend against safe secure assets
o Short-term returns and cash flows from most developed real estate are predictable
o There is a tested, legal framework for real estate financing
o There are established systems fore real estate financing
o Lenders want to lend where repayment of capital and interest is assured on a continuing and timely
basis
35
 • In the last 50 years, real estate market have
experienced:
- Transportation modal changes
- Growing preference for mixed use
Significant developments
- Densification in the suburbs/edge cities
Trends in the - Emerging new town alternatives/master
Real Estate planned communities
- Urban renewal
Market - Evolutions in the structure of work
- Increases in the prevalence of computing and
communication technology

CUHK Business School

School of Hotel and Tourism Management
36
 Square footage or • size
square meter
Gross building area • Total interior floor area of building
(GBA)
3. How to Floor plates
( S 12e)
• Gross sf of each floor

Measure • Restrooms, electrical/mechanical rooms, lobbies,

Common areas
Commercial shared amenity space

Gross Leasable area

Real Estate (GLA)
• Total floor area that can be used by tenants
• Include common areas

• Total floor area that can be rented to tenants

Net leasable area • Area upon which rental payments are based
(NLA) • Exclude common areas
• Total usable sf divided by land area
Floor Area Ratio
• Example: 60,000 sf office building on 10,000 sf
(FAR) of land, FAR=6
 Pro Rate Share
• Percentage of net leasable area
• Used to determine share of operating
expenses

se
RotaF
Stacking Plan
Po NLA
• Where each tenant is and what the
lease looks like for each of these
tenants
• Names of tenants
• Rent/sf
• Lease start and end date
• Net leasable area
1500
Exl
所有加理
( Exclude
onmon

cec )
= 4 14 ,
一
 4. Introduction to CRE Leases
• Measuring Rent
• Commercial
• $/SF/YEAR or $/SF/Month
come 1 ok
• Multifamily
多户住宅
• $/unit/month
Reutel
1 uome = 20500
• Sometimes $/SF/month
Exl = Exp
• Expense Reimbursement
• Triple Net (NNN) Leases G Retdl
,
lof 打e
• Tenant being responsible for reimbursement of all expenses associated with the operation of the
property (e.g., triple net leases) 么 ome = 0
• Full Service Gross (FSG) ex .
Hofel = FExp
• Landlord is responsible for all operating expenses
( nome = : f E ES B6 )+
"

= 0
Fap
5

• Modified Gross (MG) i δ (E 6 “

,
,
,

=
ES" B 7, 0
)+
• Tenants is responsible for reimbursing landlord for specified property operating expenses
)
"
• Base Year Stop f ET
( ES , B8
"
1 = 0
,

• Tenant is responsible for any overage above its pro rate share of property’s expenses over the base
year
超额 =7 Porcte shcl =
B51 B 6
二
 [O
*
及 ( nome
=
SE $ 10 ) $B $ 7
P
-

Percentage Rent
• Retail Leases • Example
• Increased Rental Payment as Percentage of Gross or • Annual tenant net sales
Net Sales • 1,200,000
• Natural or Fixed “breakpoint” • Lease stipulates
• Fixed Breakpoint • SF – 2,000
• Percentage of sales over fixed sales amount • Rent/SF/year - $30.00
• E.g., 5% of annual sales collected over • Natural Breakpoint – 6%
$2,000,000 *

• Natural Breakpoint Aacacl cnt =

B2 B3 =$ 60 k
• Percentage of sales over sales amount
determined by base rent Nctuel beekpont =E 21B 4 =$ 1 m

• E.g., 5% of annual sales over a natural

Anocut = B7 -
E3 = wok
breakpoint

B 4 =$ k
• Determining Natural Breakpoint * 12
7. rent
=
E4
• Annual base rent / x%
• Tenant pays x% of the overage above natural
breakpoint in percentage rent
一
一
Leasing Costs e
. Teurt heed dr -
on

)
( TI g
. lgr free
Tenant improvement
Leasing commissions Free rent period
allowance
• X% of total • Generally • Base rent abated减少
scheduled base expressed in $/SF • Expense
rent payments over • Financial incentive reimbursements
lease term for tenant to lease negotiated
• Generally paid up- space
front • Generally paid up-
front
$ 5 kX 10 =$5ok 1
Fxl : Tτ =

SUM : * + (
B 8 SUM J 4 : N 4 )
*
B9
llesiy
omalsson =
( 4 E
Other Key Leasing Terms
• Clear start / expiration date • Extension options
• Up-front leasing costs • Generally tenant options to renew
• Scheduled rent escalations • Predetermined lease term
• Predetermined rental rate
• Free rent
• Numerical value
• Requirements and restrictions • Market value
• No less than X% increase over
prior year
Next Class

• Mathematics in Real Estate

• See you next week!