Factor 1: Regardless of the form of real estate investment, the value of the und
ID: 2801008 • Letter: F
Question
Factor 1: Regardless of the form of real estate investment, the value of the underlying real estate property can affect the performance of the investment. Location is not a critical factor in determining the value of a real estate property. Factor 2: Real estate property has some unique characteristics compared with stocks, bonds and derivatives. These characteristics include heterogeneity and fixed location, high unit value, management intensiveness, high transaction costs, depreciation, sensitivity to the credit market, illiquidity and difficulty of value and price determination. Is Yukee correct to disagree with Moonn for above factors? No, Moonn is correct for Factor 1 BYes, Moonn is incorrect for both Factor 1 and Factor 2. No, Moonn is correct for Factor 2.Explanation / Answer
Answer:
C. No, Moon is correct for factor 2
The value of underlying real estate property is affected by four macro factors and three major micro factors:
The Macro factors are:
Demographics, Interest rates, General Economy, Government policies.
The Micro factors are:
Property location, improvements and upgrades of the property,
Inspection report.
The macro factors affect prices of all the properties, but the micro factor affects valuation of the particular property.
Moons assertion that location of the property is not a critical factor for property valuation is wrong.
Actually it is a very important micro factor.
Lactational advantage like availability of quality school in the neighbourhood, employment opportunities, good healthcare facilities, shopping and recreational centre, demography of the neighbourhood etc increases valuation of the property.
Factor 2 is correct.
Other investments like stocks, bonds derivatives etc are homogeneous, hence can have standard price . It is possible to analytically arrive at their inherent prices. The price discovery can be made based on demand and supply through stock exchanges.
Each property is different and it is very difficult to analytically arrive at an inherent value. There is no exchange for price discovery.
Properties cannot be moved like other assets. Other investments can be sold in parts , for example if you are holding 10,000 shares, you can sell 100 shares from your holding. Properties require high amount of investment and cannot be liquidated in part. The investment is relatively liquid. Properties depreciate, have high transaction costs.
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