True ✅ or False ❌ - With Explanations
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AI2102 - Exam 18-01-12
1. Definitions and concepts (10p)
a) Highest and Best Use (2p)
Reasonable and legal use of vacant land that is
- Legally permissable
- Financially Feasable
- Physically possible
With an outcome of maximum profit.
b) Fundamental real estate demand (2p)
Quantity of a particular and affordable real estate product that is demanded by some majority at a specific point in time.
Key words: Quantity, affordable, real estate product, some majority, specific point in time.
c) Headship rate (2p)
Defined as number of households divided by the population.
It is a proxy for average househould size. If the headship rate is 40%, the average household size is 1/0,4 or 2,5 humans per household.
d) Market segmentation (2p)
Dividing a market into meaningfull groups based on characteristics and attributes ex. demographics, legal, local, physical and political.
e) Entitlement risk (2p)
Entitlement risk arises when a property developer builds a new property or converts one. These projects must involve the local government and community to mitigate entitlement risk.
2. Productivity Analysis (10p)
a) How is productivity analysis used in a proposed project? Explain the three types of attributes in the productivity analysis principles. (4p)
Productivity analysis is a tool to study and determine highest and best land-use. Its based on characteristics and comparing attributes within the characteristics to evaluate.
Attributes and characteristics are not the same thing. Attributes tend to be more specific, while characteristics are broader. Ie. Within a characteristic there could be more characteristics but the it ends with attributes.
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Characteristics | Attribute Examples | On-site | Off-Site |
Legal | Hight of building 📐 | - | - |
Physical | “Dishwasher from Miele” 🍴 | Green Space 🌳 | Sun orientation 🌤️ |
Locational | Distance to main road, Sea View | - | - |
b) What kind of mistakes can be done if the productivity analysis is not carefully carried out? (2p)
The amenity index serves as proxy for our projects competitiveness in the market. It indicates how competitive our project is compared to other products. We derive the market capture rate based on the amenity index. Therefore, if we are not thorough with the amenity index we increase the risk and uncertainty of the market capture rate. In real estate uncertainty is the enemy of making money.
c) Explain this proposition: If Highest and Best Use are reached in two different projects then the projects have to contain different attributes. (2p)
Highest and best use, is contextually bound with each project. Exact location different for each project. Since you cannot build two different buildings at the same site, each project is unique. Some Charcteristics are allways bound to location. Therefore attractive attributes are contextually bound to the projects location.
d) Give two examples of static and dynamic attributes off-site (one for each) (2p)
Dynamic off-site → Busstation under construction 🚌
Static off-site → Roads, Seaview 🐳
On-Site 📍 | Off-site | |
Dynamic
(Planned) | Planned pre-school
on groundfloor | Bridge, Road or Busstation under construction 🚌 |
Static
(Built or Existing) | Topografi, Location 🗺️ | Roads, Seaview 🐳 |
3. Urban Growth - Models, Patterns and Location quotient (10p)
a) Explain at least three Urban Growth models in terms of land use and growth patterns of one of them. (6p)
Concentric Zone Model
Concentric Model Zones
Zone 1. Central Business District (CBD
Zone 2. “Zone of Transition
Zone 3. Housing for workers
Zone 4. Housing middle-high income households
Zone 5. Commuter Zone
“Looks like an old church Village
→ Land use expands concentric (in a circle) and overflow occurrs when increasing the radius
→ Transportation costs and time value, topography are not a part of the model
Sector ( Wedge) Model
Sector Zoning
Zone 1. Central Business District (CBD
Zone 2. Wholesale and Manufacturing
Zone 3. Low-income Residential
Zone 4. Housing middle income
Zone 5. High-Income
“Looks Like Lidingö”
→ Efficiency of corridors are introduced
→ Topography has a large impact on patterns of development
Multiple Nuclei Model
Sector Zoning
Zone 1. Central Business District (CBD
Zone 2. Wholesale and Manufacturing
Zone 3-5 Low, middle and high income Residential
Zone 6. Heavy Manufacturing
Zone 7. Outlying Business District
Zone 8. Residential Suburb
Zone 9. Industrial Suburb
Zone 10. Commuter Zone
“Looks Like Texas”
→ Several focal points with impactful activities - Cultural, Shopping, industrial Districts
→ Use of land highly specialised and each center serves a economic purpose.
Axial Model (Radial Corridor) Pattern
General Notes
- Key Roads are corridors towards CBD
- Expansion of land use occurs through corridors
- Topografi & Water are boundries for development
“Looks Like Stockholm”
→ Distance and time spent commuting to CBD determines the value of the land.
→ Use of land highly specialised and each center serves a economic purpose.
b) What is the relationship between urban growth patterns and real estate demand?
Real estate demand of land correlates with the urban growth pattern. For the Axial or sector wedge model its somwhat dictated by the growth pattern.
If there is high friction to access or commute to the CBD from a specific property, the demand for that property could be close to zero. Therefore, not taking into account the urban growth pattern into a demand analysis will misrepresent the percieved value and demand for a specific property.
c) Location quotient is method used to explain urban growth due to employment increase of certain sectors. Explain how sectors are defined based on LQ estimation. (2p)
Location quotient Is method used to explain if an area exports or imports labour or goods. Beeing a exporter basically means this area provides more value than it consumes within a sector. Exports are pre-requisite for growth, hence exports are good.
Location quotient
Nurses 🧑⚕️ | Labor 💼 | |
Local 🏡 | Ln | L |
National 🏘️ | Nn | N |
LQ = (Ln/L) / (Nn/N)
If there is a higher density of nurses in the local area than in nationally market.
LQ will be > 1.
→ The Local area exports nurse labour to other regions.
4. Market Area (10p) Concept, Levels & Delineating Techniques
a) Explain the concept of market area. Why do we need to determine the market area for a given development? (4p)
Market area is a trade and geographic area, where the majority of customers and competitors exist.
The main reason to determine a market area is to close to scope and set boundries within the total market. This is done by differentiating characteristics and attributes.
b) Describe the three levels of the market areas. (3p)
PMA- Primary Market Area
People who all ready live within the area and have the means and needs to buy the product. Customer base with consisting of few humans, but with high penetration.
SMA - Secondary Market Area Located outside of the primary market. Larger amount of people, semi high penetration.
EMA - Extended Market Area Everything outside of the secondary market. Huge amount of people, but very low penetration.
c) Describe the three general techniques for delineating market areas. (3p)
General Delineating Techniques for Market Areas
- Location of customers
- Specify & Compare analogues to our property
- Market Delineation by Substitutes properties → Keywords = Location customer base, Specify & Compare analogues, Substitutes
5. Demand and competitive supply (10p)
a) As Real Estate Professionals it is important to be able to identify major exogenous determinants (exogenous means factors outside of the model or system) that drive demand and supply of different asset types. At least mention three of the exogenous determinants of new residential construction. (3p)
Exogenous Factors → Factors outside of our control
Macrodeterminantes 🏦
- Effective rate set by the FED or Riksbank (Some call this the interest rate)
- Quantitative easing, the FED buying loans or assets.
Other Exogenous Factors 🇪🇺
- Regulations of market rent
- Taxes
- Market expectations
- War breaking out in Europe
b) Explain two kinds of desirable vacant space and two kinds of undesirable vacant space. Which undesirable vacant space should be considered competitive with subject property? (5p)
Desirable Vacant space 👍
Frictional Vacancy 🖕
- The space is saved for future tenants
Lag Vacancy ⏳
- Can’t be leased because it’s under construction
Undesirable Vacant space 👎
Cyclic Vacancy 📉
- A competitive product that can’t be leased out in a economic downturn
Structural Vacancy 🏚️
- Not a compelling and product that meets the required needs of the market.
c) Briefly explain the Pipeline effect and its relevance to the Real Estate Market, and discuss why the number of approved plans is not the best measure of new supply. (2p)
If the goal is to build more houses, the “definition of done” is when people move into their new homes. Not when the plan for the homes are approved.
A better measure would be the amount of started projects. “Spaden i backen”
(Could include a scheme of the planning process, cause it’s a long pipeline)
6. Amenity Index calculation (10p)
Complete the following table and provide explanations of your answers:
Attributes | Subject | Project 1 | Project 2 |
School Expenditure / Pupil | 4000 | 3700 | 3500 |
Security | 105 | 107 | 100 |
Neigbourhood Incomes | 37500 | 37500 | 3500 |
Crime Rate | 6 | 7 | 4 |
Index | Subject | Project 1 | Project 2 |
School Expenditure / Pupil | ? | ? | ? |
Security | 105 | ? | 100 |
Neigbourhood Incomes | ? | 107 | 100 |
Crime Rate | ? | ? | 143 |
Unweighted Amenity Indicies | ? | ? | ? |
Subject Competetive Postion | ? | ? | ? |
Complete the following table and provide explanations of your answers:
In the amenity index, High Numbers means good. Choose appropriate low or high number given by the first table as the bench mark. Then calculate the score by dividing the benchmark with the projects number.
Ex. Crime Rate Benchmark = 7
Project 2 Crimate rate Score: 143 → 7/4
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7. Retail Analysis (10p)
Retail analysis differs from analysis of housing projects in many ways. For example there are different methods to estimate the market area of a retail property. a) Gravity modelling is one method suggested by Fanning. Define the equation of the gravity model and explain how it is used as clearly as possible. For example, define a target retail center and use two competing retail centers to clarify your point. (6p)
Where Size “Retail Site A” > “Retail Site B”
Breaking point from B to A:
Breaking point B to A =
(Driving Time from A to B) / 1 + Sqrt( Retail Site A / Retail Site B) ”Den som är i täljaren ska vara störst och man åker från den i nämnaren till den i täljaren” - Ulf Nilsson
b) In what way is this model similar or different from estimating the market area for a housing project? (4p)
The land use for retail and housing is totally different. Furthermore, this gravity model was created in the late 1930;s in the US. Driving and Cars were a part of their lifestyle. Before e-commerce consumers went and bought their products, this is when this theorem was usefull.
”Den som är i täljaren ska vara störst och man åker från den i nämnaren till den i täljaren” - Ulf Nilsson
Today the quality of the site matters more than the driving distance and size of it. Is the shopping mall / retail location remarkable? If yes, then driving distance will
Supply, Competitive Supply & Fair market share
Fair market share = Our Projects share of total market supply → Our supply divided by (Our supply + Competitive Supply ) = Total Market Supply
Supply = | Existing Supply + New Supply + Demolished Supply - Uncompetitive Supply |
Competitive Supply = | Existing Supply + New Supply |
Fair Market Share = | = Our supply / (Our supply + Competitive Supply ) |
Six steps of Real Estate market analysis
The six-step process | Key Result of each step | What we try to figure out | |
1. Property productivity analysis | Define the product | Which attributes of the subject property that can be attractive for the market? | Define attractive attributes |
2. Delineate the market | Define the market area and potential target groups | Who and where are the most likely users of these attributes? | Divide the market and look for customers |
3. Demand analysis | Investigate and forecast demand factors | What is the demand for this type of property? Is this property use needed? | How many people want this? |
4. Supply analysis | Investigate and forecast competitive supply | What is the competition? | Are they supplied? |
5. Market Condition Analysis | Analyse the interaction of demand and supply | What is the condition of the market? | What’s the condition? |
6. Subject Marketability analysis | Forecast market share and absorption | How much of this market can the subject property capture? | Can we capture customers? |
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REMA model Notes
Levels of market analysis (A-D)
criteria for choosing appropriate level of analysis
A & B → When we optimize for speed and trying to figure out if something is worth it
C & D → When we optimize for calculations being accurate ie. when we decide to proceed with a project.
Lastly, what analysis to use is circumstantial and depends on the customer, the market, the project etc.
Inferred Demand Studies (Stable Market) | Fundamental Demand Studies (Unstable Market) |
Analysis A & B | Analysis C & D |
Based on: | Based on: |
- Instinctive Knowledge | - Quantifiable data |
- Trend Analysis of historical data and selected comparebles. | - Forecast specific subject data |
Inferred Subject Attributes | Quantified Subject Attributes |
Inferred locational determinants of use and
marketability by macro analysis | Quantified and graphic analysis of
location determinants of use and
marketability by macro and micro analysis |
Inferred demand from general economic
base analysis implemented by others | Inferred demand derived by original
economic base analysis |
Inferred demand by selected comparables
and demographic data | Forecast demand by subject-specific
market segment |
Inferred supply by selected comparables | Quantified supply by inventorying existing
and forecasting planned competition |
Inferred market equilibrium, highest and
best use, capture conclusions | Quantified market equilibrium, highest and
best use, timing quantified capture forecast |
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GAP, Market Capture Rate, Absorption
Gap → Difference between supply and demand. Could say the gap between demand and supply, but the market gap on yearly basis could also be said to be the gross annual potential. (GAP)
Market Capture Rate =
Fair Market Share * Amenity IndexAbsorption =
Market Capture Rate * DemandEffective Demand
We spend 30-45% of our income to have a place to exist. - Björn Andrén
Disposable Income = Housing Costs / (0,3)