Global (Real Estate) Capital Markets The Past(2000-2007) o Prices Owner-occupied residential Incom e Property o SourcesofEquity o SourcesofM ortgage D ebt o W here Did A llthe M oney Com e From ? CapitalM arketFlow s RealEstate The PresentCreditCrunch The Future o W hatare the risks?
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Global (Real Estate) Capital Markets. Global (Real Estate) Capital Markets Residential Prices.
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Global (Real Estate) Capital Markets
The Past (2000-2007) o Prices
Owner-occupied residential Income Property
o Sources of Equity o Sources of Mortgage Debt o Where Did All the Money Come From?
Capital Market Flows Real Estate
The Present Credit Crunch
The Future
o What are the risks?
Global (Real Estate) Capital MarketsResidential Prices
House Price Appreciation Rates1999:4-2007:3
100.00
120.00
140.00
160.00
180.00
200.00
220.00
240.00
260.00
280.00
300.00
Quarter
Pri
ce I
nd
ex
Los Angeles (13.4%)
San Diego (11.3%)
US (7.6%)
Denver (4.5%)
Dallas (4.0%)
Omaha (3.6%)
Global (Real Estate) Capital MarketsResidential Prices
House Prices 2006:3-2007:3
85.00
90.00
95.00
100.00
105.00
110.00
115.00
2006:3 2006:4 2007:1 2007:2 2007:3
Quarter
Pri
ce I
nd
ex
UT (+12.9%)
TX (+6.3%)
CO (+2.2%)
US (+1.8%)
FL (-2.1%)
MA (-2.3%)
CA (-3.6%)
Global (Real Estate) Capital MarketsResidential Prices
MSANAME2006:3-2007:3
price change (%)Odessa, TX 17.5Midland, TX 17.3Wenatchee, WA 14.9Provo-Orem, UT 13.6Grand Junction, CO 13.4Ogden-Clearfield, UT 13.3Salt Lake City, UT 12.7Cumberland, MD-WV 12.3Casper, WY 12.1San Angelo, TX 11.9Lebanon, PA 11.6Idaho Falls, ID 11.2Killeen-Temple-Fort Hood, TX 10.8
Global (Real Estate) Capital MarketsResidential Prices
MSANAME2006:3-2007:3
price change (%)Vallejo-Fairfield, CA -7.3Salinas, CA -7.7Naples-Marco Island, FL -8.2Port St. Lucie, FL -8.3Sacramento-Arden-Arcade-Roseville, CA -8.7Palm Bay-Melbourne-Titusville, FL -9.2Modesto, CA -9.3Sarasota-Bradenton-Venice, FL -10.0Cape Coral-Fort Myers, FL -10.0Stockton, CA -10.4Yuba City, CA -11.6Santa Barbara-Santa Maria-Goleta, CA -12.2Punta Gorda, FL -12.4Merced, CA -13.7
Global (Real Estate) Capital MarketsResidential Prices
Colorado House Prices2006:3 to 2007:3
90.0
95.0
100.0
105.0
110.0
115.0
120.0
2006:3 2006:4 2007:1 2007:2 2007:3
Quarter
Pri
ce In
dex
Grand Jnct (+14.0%)
Boulder (+3.1%)
Co Spr (+1.6%)
Fort Collins (+0.2%)
Pueblo (+0.2%)
Denver (-0.3%)
Greeley (-0.9%)
Global (Real Estate) Capital MarketsIncome Property Cap Rates
Today (December 11, 2007), the Federal Open Markets Committee (FOMC) announced it would lower its target federal funds rate by 25 basis points to 4.25%. The federal funds rate is the rate depository institutions charge each other to borrow reserves on a very short term (e.g. overnight) basis. The Fed achieves its target by buying/selling securities in the open market.
Global (Real Estate) Capital MarketsThe Fed
US Govt Interest Rates
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
Month
Rat
e
Fed Funds
3-mo Tbills
10-yr Tbonds
Global (Real Estate) Capital MarketsThe Fed
The Money Supply
MO: physical currency plus accounts at the central bank M1: M0 + cash held in reserve + demand (checking) accts M2: M1 + savings accounts + money market accts + small CDs ( < $100,000) M3: M2 + all other CDs + Eurodollar deposits + repurchase agreements
Global (Real Estate) Capital MarketsThe Fed
Money Supply and Economic Growth in US
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2000 2001 2002 2003 2004 2005 2006
Year
Per
cen
t C
han
ge
Growth in M2
Economic Growth
M2 - Growth
Global (Real Estate) Capital MarketsWhere Did the Real Estate Capital Come From?
Shift in investors' preferences (positive alphas)
o Real estate really is a separate asset class
o Households allocate more wealth to real estate
o Investors allocate more to real estate
Lower cost of debt resulted in
Lower WACC
More leverage for real estate acquisitions
o Equity Investors: Private Equity/Hedge Funds
Example: Blackstone
o Credit Markets: Wall Street Financial Engineers
Examples: CDOs
Global (Real Estate) Capital MarketsWhere did the Real Estate Capital Come From?
Securitization of real estate
o Residential Real Estate
Securitizing Subprime Mortgages
Underwriters overwhelmed
o Commercial Real Estate: more diversification (less risk?)
CMBS
CDOs
o Consequences
Higher L/Vs: more leverage
Private Equity/Hedge Funds In
Traditional Institutional Investors Out
Global (Real Estate) Capital MarketsThe Present
Consequences of the Current Credit Crunch
Credit Spreads increasing
Required DSCs decreasing
Lower L/V (zero?, but not for too long)
Cash is king (again)
Marginal investors (real property valuations) depend on WACC