Understanding property investment and finance - Free Essay Example

Sample details Pages: 8 Words: 2384 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Corporate and project-based funding for a property company: The benefits of the various types of corporate and project-based funding are determined by the size of the property company looking for funding, whether it is listed on the stock exchange, and whether it is a property investor or a property trader. Discuss I. Introduction The uncertainty and the difficulties of the modern economies have create the necessity of alternative sources of finance solutions both for the companies and for the individuals that are dealing with a commercial activity, either as investors or as traders. Don’t waste time! Our writers will create an original "Understanding property investment and finance" essay for you Create order Although the existing types of financial resources are characterized by diversity and flexibility, the gathering and the evaluation of the data needed for such a procedure to be completed is usually a very difficult task. This assumption has lead to the use of specialized services, like the financial or the business management, which could help the survival of the corporate or the individual business and could guarantee its growth for the future. One of the industries that suffer a high pressure is that of the property investment. The use of property as a mean to achieve a more stable and guarantee source of income has been a common phenomenon of the commercial activity both during the past and to our days. The investment to property can offer the stability and the promise of a slow (but more guarantee) profit and such an attribute is very desirable especially during the periods that suffer from constant fluctuation and financial pressure. On the other hand, property as an investm ent option contains a lot of special features that give to it a unique and, sometimes, a risky character. Enever N. and Isaac D. (1994, 17-22) argue that the property is distinguished compared the other types of investments. They present a series of attributes that are considered as related with the property investment, with a special reference to its heterogeneity, which is explained as the unique elements that usually characterize each property, like its location, its design and its size. They also consider the inelasticity of its supply as a major factor that formulate and control the flow of the activities that are connected to this financial sector. More specifically, they state that the number of property that are offered during a period of time tend to be limited and cannot change during the periods that present increase or reduction in demand. Other factors that constitute a special feature regarding the property investment area are, according to Enever N. and Isaak D. (1994 , 19-20) à ¢Ã¢â€š ¬Ã‹Å"the high risks (physical risks, risk of liability and financial risk), the imperfect knowledge and the government interventionà ¢Ã¢â€š ¬Ã¢â€ž ¢. Under the above circumstances of uncertainty and constant fluctuation, the property market could be characterized as a risky choice for investing. However, the absence of stability in the international market has created the necessity for a secure option regarding the investment decisions. And we should recognize that although the property has a lot of changing factors, it is still one of the most safe type of investment activities due mostly to its physical existence and the increase of value that tend to present even in difficult financial circumstances. II. Design of the corporate and project-based funding of a company or individual that is activated in the property sector A. Useful data à ¢Ã¢â€š ¬Ã¢â‚¬Å" gathering, evaluation In order to achieve an integrated solution concerning the funding of a pro perty-based activity, we have to gather and analyze a series of data, mostly financial ones, which represent the trend of the market, the position of the property investment as a commercial (and income provided) activity and the general strengths and weaknesses of the sector. An absolutely necessary indicator is that of the current property market. When referring to the above market in general, we usually mean the construction works that are in progress, the volume and the price of the transactions made in the area of land and buildings and the rate of investment that is being made in the property area. Hargitay S. and Yu S.M. (1993, 256) divide the sources that can be used towards that purpose into the following two categories: à ¢Ã¢â€š ¬Ã‹Å"the traditional sources (e.g. directories, handbooks and encyclopedias, statistics, economic forecasts, trade literature, newspapers and so on) and the contemporary sources (property databases, on-line and information services and consultan cy services)à ¢Ã¢â€š ¬Ã¢â€ž ¢. The gathering and the evaluation of the above data is usually the work of the financial or business management team, which has the responsibility to represent an integrated and updated à ¢Ã¢â€š ¬Ã‹Å"imageà ¢Ã¢â€š ¬Ã¢â€ž ¢ of the market in the relevant sector. This à ¢Ã¢â€š ¬Ã‹Å"imageà ¢Ã¢â€š ¬Ã¢â€ž ¢ is going to be used afterwards for the design of a detailed financial plan that is going to be applied for a specific property investor (company or individual) regarding his funding from a state (or private) institution. B. Use of the financial data for the design of a funding strategy à ¢Ã¢â€š ¬Ã¢â‚¬Å" role of the financial manager In order to produce an integrated and effective funding strategy for a property investor (a company or an individual) we have to analyze, as above mentioned, the financial data (that have been gathered with the pre-described procedure) and decide the best available tool that meets the specific requirements. After building a pricing model (using the current discount rate) and produce a forecast, the evaluation of risk can help us to construct a dynamic portfolio management plan that will present the structure, the development and the aim of the funding. Under the above circumstances, the management team has to consider the design and the presentation of a funding strategy that will meet the specific requirements and will guarantee (at the most possible level) the achievement of the scopes. In that occasion, according with the Hoesli, M. and McGregor, B.D., (2000, 179) the decisions that are going to be made should meet the following requirements: à ¢Ã¢â€š ¬Ã‹Å"a) a statement of objectives, i.e. identification of the benchmark, evaluation of risk and the return that will follow and the timescale, b) a detailed and clear portfolio analysis, i.e. presentation of the current structure referring to the benchmark, c) calculation of the expected stock return and risk, d) explanation of the poss ible consequences and the further necessary actions in case that no action is taken, e) presentation of a strategy for the specific portfolio plan (property that is needed to be bought, the one that it should be sold and the asset management that could be most effective for the above strategyà ¢Ã¢â€š ¬Ã¢â€ž ¢. The role and the competence of the management team are then evaluated using the criteria of effectiveness regarding the achievement of the above targets (see also the plan of British Land for refinancing of a part of its development in order to secure extra funding, Daily Mail, 22/1/2005). The basic characteristics of the successful management solution seems to be however, the concentration on the specific requirements, the production of an achievable strategy (as of the resources and the money that are going to be used for its completion) and the level of the achievement of the final target. C. Aspects and elements of the funding strategy investment plans for the incre ase of long-term debt finance When building a financial strategy we should primarily consider the sector in which this plan is going to be applied. If the model of activities that is going to be designed, does not meet the requirements of the specific industry market, then its failure is inevitable even if its structure and its operation could otherwise be characterized as effective and profitable. One of the most known strategies for the property finance has been the mortgage-backed borrowing (a plan that it is currently followed by a lot of investment banks is à ¢Ã¢â€š ¬Ã‹Å"to teaming up with management operators to take over property companiesà ¢Ã¢â€š ¬Ã¢â€ž ¢ The Lawyer, 26/3/2001). The above technique had been used mostly in the US and then it has been extended to the rest of the world market as a secure method to finance the property investment (J. Oà ¢Ã¢â€š ¬Ã¢â€ž ¢Connor, 2005. 9). Enever N. and Isaak D. (1994, 6) distinguish between the à ¢Ã¢â€š ¬Ã‹Å"directà ¢Ã¢â €š ¬Ã¢â€ž ¢ and à ¢Ã¢â€š ¬Ã‹Å"indirectà ¢Ã¢â€š ¬Ã¢â€ž ¢ investment to property. As they state, the direct investment refers to the acquisition of the property à ¢Ã¢â€š ¬Ã‹Å"by auction, by tender, by private treaty, by take-over bid, by property development and by sale and lease-backà ¢Ã¢â€š ¬Ã¢â€ž ¢ whereas the indirect investment can be achieved by investing in à ¢Ã¢â€š ¬Ã‹Å"property bonds or in shares in property companiesà ¢Ã¢â€š ¬Ã¢â€ž ¢. Pike R. and Neale B. (1999, 513) explore another type of raising long-term debt finance, that of leasing and sale-and-leaseback. According to the explanation of term à ¢Ã¢â€š ¬Ã‹Å"leasingà ¢Ã¢â€š ¬Ã¢â€ž ¢ as it is presented by Pike R. and Neale B. (1999, 433) leasing is a technique that offers to a company the option to obtain the use of piece of equipment which cannot buy it as a whole unit because it has not the financial strength for such a purchase or maybe donà ¢Ã¢â€š ¬Ã¢â€ž ¢t want to dispose all the amount of money needed for su ch an acquisition and prefer to divide the total price into a long-term debt plan arranged for the use of the specific item (and for its acquisition after a period of time). The sale-and-leaseback technique is characterized by the à ¢Ã¢â€š ¬Ã‹Å"transfer of the ownership of a specific item of property but with the retention of the use of it for a pre-arranged period of timeà ¢Ã¢â€š ¬Ã¢â€ž ¢ (Pike R. and Neale B., 1999, 514). The vendor can achieve a growth to its capital, but on the other hand he has to abandon all his rights to the specific item and all the gain that followed it (as an example, Pike and Neale refer the capital appreciation, 514). On the other hand, Damodaran A. (2001, 488-492) suggests the following debt financing options: à ¢Ã¢â€š ¬Ã‹Å"the bank debt (which is included in the mortgage-backed debt that was analyzed above), the bonds (which are offered only to the large firms) and the leasingà ¢Ã¢â€š ¬Ã¢â€ž ¢. All the above proposed plans can operate normall y and according to their purpose when the analysis of the business data is combined with a complete evaluation of the specific financial industry (i.e. in our case the property market) as well as the preparation of a detailed and accurate financial strategy that could protect both the investor and the debtor if a change in the terms and the conditions of the plan occur. III. Types of property investors à ¢Ã¢â€š ¬Ã¢â‚¬Å" financial behaviour of the debtors The property market is an area of investment both for companies and for individuals. The needs for a long-term debt finance plan are being increased especially in our days (shortage of cash flow, constant fluctuation, unstable economic and political environment in the international community). Under the above circumstances, the behaviour of the debtors is being transformed in order to respond to the increase of the demand for funding and to cover à ¢Ã¢â€š ¬Ã¢â‚¬Å" at the upper possible level à ¢Ã¢â€š ¬Ã¢â‚¬Å" the risk of lo ss as a consequence of the general financial uncertainty. Moreover, according to C. Benson (1999) the investors tend to prefer the structural growth rather than the cyclical growth. Although the type of the property investor (an individual or a company) is of major importance particularly when referring to the cover of the risk of loss of the institution that offers the option of funding, there is an element that equals the position of these two types of investors in the property market and this is the existence of risk. Someone could argue of course that in the case of the individual investors, the risk is much higher, however the existence of companies with no real financial credentials, has eliminate the application of such a criterion when a decision for funding is to be taken. Under the above circumstances, we could recognize both to the individuals and the corporate investors the right to ask for a funding in order to secure their activities in the property investment se ctor. The prerequisite for such a decision by the institutions which are authorized for activities of that kind, should be the proper and effective use of the available resources rather the level of the financial position of the investor, which could in any case be differentiate if an unexpected loss appears. IV. Conclusion The design and the operation of the property market have imposed the funding as the only safe solution for the financial recovery of both the corporate and the private property investors. The relevant decision has to be formulated after a careful examination of the condition of the interested party bearing in mind that the current financial position of an investor can easily change in accordance with his preferences when moving to an investment decision. Furthermore, discussing for the funding decision, the financial turbulences that tend to appear from time to time even in the strong markets, impose the existence of sufficient and detailed information whic h has to be combined with an accurate and well à ¢Ã¢â€š ¬Ã¢â‚¬Å" organized financial plan. The role of the management team is à ¢Ã¢â€š ¬Ã¢â‚¬Å" in that case à ¢Ã¢â€š ¬Ã¢â‚¬Å" decisive as it can create all the prerequisites for a successful investment decision. References A. Books Brett, M., (1997), Property and Money à ¢Ã¢â€š ¬Ã¢â‚¬Å" A simple guide to property investment and finance Damodaran, A., (2001), Corporate Finance à ¢Ã¢â€š ¬Ã¢â‚¬Å" Theory and Practice Enever, N., Isaak, D., (1994), The Valuation of Property Investments Hargitay S.E., Yu M.S., (1993), Property Investment Decisions à ¢Ã¢â€š ¬Ã¢â‚¬Å" A quantitative approach Hoesli, M., Macgregor, B. D., (2000), Property Investment à ¢Ã¢â€š ¬Ã¢â‚¬Å" Principles and Practice of Portfolio Management Myddelton, D. R., (2000), Managing Business Finance Parker, R. H., (1994), Understanding Company Financial Statements Pike, R., Neale, B., (1999), Corporate Finance and Investment B. Journals Benson, C., (1999), à ¢Ã¢â€š ¬Ã‹Å"With low inflation and a focus on shareholder value, the quoted sector will see massive mergers à ¢Ã¢â€š ¬Ã¢â‚¬Å" and departures, argues Sir Christopher Benson, be big or de-list, you can quote meà ¢Ã¢â€š ¬Ã¢â€ž ¢, Estates Gazette (3/7/1999, 73) Catalano, A., (1999), à ¢Ã¢â€š ¬Ã‹Å"Wealth Generation without inflationà ¢Ã¢â€š ¬Ã¢â€ž ¢, Estates Gazette, (5/6/1999, 57) Law Society Gazette, (2003), à ¢Ã¢â€š ¬Ã‹Å"News à ¢Ã¢â€š ¬Ã¢â‚¬Å" Company + Commercial: News in Briefà ¢Ã¢â€š ¬Ã¢â€ž ¢, (27/3/2003, 12:8) Oà ¢Ã¢â€š ¬Ã¢â€ž ¢ Connor, J., (2005), à ¢Ã¢â€š ¬Ã‹Å"UK companies unlock wealth from their bricks and mortarà ¢Ã¢â€š ¬Ã¢â€ž ¢, The Lawyer (Feb. 28/2005, 9) The Lawyer, (2001), à ¢Ã¢â€š ¬Ã‹Å"London Real Estate: Battersea Power Stationà ¢Ã¢â€š ¬Ã¢â€ž ¢, (May 21/2001, 31) The Lawyer, (2001), à ¢Ã¢â€š ¬Ã‹Å"A O and Dechert flex their property muscles in BPT dealà ¢Ã¢â€š ¬Ã¢â€ž ¢, (Mar. 26/2001, 15) The Lawyer, (2004), à ¢Ã ¢â€š ¬Ã‹Å"White Collar Crime: Writing the wrongà ¢Ã¢â€š ¬Ã¢â€ž ¢, The Lawyer, (15/11/2004, 27) Trevelyan, L., (2004), à ¢Ã¢â€š ¬Ã‹Å"Real Estate Investment Trusts: REIT Here, REIT Nowà ¢Ã¢â€š ¬Ã¢â€ž ¢, Law Society Gazette, (7/10/2004, 38:20) C. Newspapers Daily Mail, à ¢Ã¢â€š ¬Ã‹Å"Britland in plan to raise extra pounds 500mà ¢Ã¢â€š ¬Ã¢â€ž ¢, (22/1/2005, 104) Keers, H., à ¢Ã¢â€š ¬Ã‹Å"Miners and WPP fuel indexà ¢Ã¢â€š ¬Ã¢â€ž ¢s return to 5000à ¢Ã¢â€š ¬Ã¢â€ž ¢, The Daily Telegraph, (26/2/2005, 33) Smith, P., Mullock, S., à ¢Ã¢â€š ¬Ã‹Å"Football: How millions were slashed off price of Elland Road; special report: Paul Smith and Simon Mullock investigateà ¢Ã¢â€š ¬Ã¢â€ž ¢, Sunday Mirror, (6/3/2005, 69)