Lecture 4 Nature of Real Estate

Nature of Real Estate

• What type of Real asset or Financial assets do real estate investors invest in?

- Physical Assets

– Property rights– Contracts: Financial Assets

Real Estate as Physical Asset

• Surface : Land and Improvements

• Subsurface : Minerals below ground

• Air Space : Air Rights above ground

Real Estate as bundle of Characteristics• Physical Characteristics : Size, Shape,

Location etc.

• Infrastructure and Neighborhood: Streets, Fire Protection etc.

Implication of Real Estate as bundle of Characteristics

• Real Estate is a Heterogeneous Asset • Valuing Real Estate implies pricing its characteristics or

attributes.• The characteristics have value only if they create a flow

of benefits.• Flow of benefits occurs over time and cannot be stored• Flow of services usually converted into a single number

called discounted value

Other Aspects of Real Estate• It is a consumption good• It is also a productive asset• Investment and financing decision are inseparable• It is a voracious user of Debt Capital• The largest component of fixed capital formation in most

countries

Legal Notion of Real estate• Real estate is most often viewed as Bundle of

Rights• Investors invest in these bundle of rights of

property rights• The amount and duration of the expected cash or

benefit is defined by the nature of property rights• Value or price of real estate is thus determined by

quality of property rights

Classification of Rights and interests in Real Estate

• Freehold Interest– Fee Simple

– Defeasible Fee

– Life Estate

• Leasehold Interest– Estate for years

– Periodic Tenancy

• Non-Possessory Interests– Easement

– Liens

Transferability of interest creates value

The nature and quantum of property rights is reflected in title

Title: documents, records, and Acts etc that prove owner ship

What is a Deed?

It is the legal instrument when properly executed and delivered conveys title or ownership from the grantor to grantee.– General Warranty deed– Special Warranty deed– Quit Claim deed