real estate finance assignment help

real estate finance assignment help

Real Estate Finance

1. Introduction to Real Estate Finance

It is natural that such thoughts and questions should have urgent attention from professionals, not to mention the academic community. Real estate finance is a comprehensive empirical approach to real estate finance and strategic pricing decisions. The paper combines a large list of housing preferential service and source of risk as well as several potentially viable pricing variables to study the determinants of housing prices. The inclusion of objective variables in this streamlined list covers most of the primary concerns of those calling for having multiple asset classes in real estate markets. In accounting for the housing market, the study treats four housing characteristics as stylized risk factors. The set of base assets could be designed to capture the aggregate wealth effect in response to movements in GDP growth. These four risk factors could alternatively be designed to gauge the effect of interest rate dynamics on housing demand by market participants.

Real estate finance is the study of the opportunities, problems, and risks associated with real estate purchase or investment. Given the large capital expenditure and the long-term nature of making real estate transactions, the role of real estate finance has undoubtedly attracted many researchers. Traditionally, investors have been primarily concerned about the uncertainty of business cycles and demographic developments. Recent research may be due to the current focus on financial market diseases. The housing market is characterized by large exchange rate fluctuations, substantial lag in reaction base prices on investment demand, and bruto or heteroscedastic deviations from required returns. Despite these identifying characteristics, many facets of the housing market are not yet fully understood.

2. Principles of Real Estate Investment

1.2 Objectives and Modeling of Real Estate Investment Real estate investment and project planning are mostly profit-oriented. Profit, occupancy, and the financial structure of lease financing often mutually influence each other. Operating risk and investment risks are the main types of real estate risks. Real estate investment risk arises primarily from investors’ anticipated return on properties. With some reasonable assumptions, project planning and investment in real estate can be envisaged with the operating proforma effectively. It seems that most of the real estate-related teaching and management underline that the current cost does not necessarily have to forecast future periods’ costs, which is consistent with classic financial theory. The interrelation of property market allocation and operating input comes from the model construction of the real estate investment decision, while the profit return from property investment due to the development of global markets, in short, the cyclical trend of rents could be potentially marginalized results of the demands on real estate.

Real estate investment is normally a stable, unreactive, and enduring investment. Real estate investors and owners are able to derive a sustainable income stream from ground lease, leasehold rental income, rental income, etc. In general, the sources of real estate investment income from a piece of land may be derived from direct leasing, operating the building in different forms of commercial services, which include restaurants, hotels, shopping malls, retail stores, etc., and income from lease renewal, revaluation, etc. As a result, the return from real estate investment under most of the time can be passively realized by the contingent rent from rental of land or property.

3. Financing Options for Real Estate Projects

The first one is commonly known as developer equity financing, where developers are required to invest their own private equity to start the project and demonstrate their confidence to investors and other stakeholders. The second one, debt financing, is the most commonly used source of real estate finance. Different types of debt funding, such as mortgage loans, are provided based on the risk associated with the project. The features of these loans determine the collateral value of the project and assets. In return, debt investors receive interest payments as a percentage of the loan amount to compensate for the risk they take. In most real estate projects worldwide, financing is typically a combination of both equity and loans.

Financing plays an important role in most real estate projects. One typical challenge in these projects is the financing, as they often require significant investment. To support the financing, real estate developers, along with contractors and suppliers, come together to explore different financing options. Generally, real estate financing is done through two ways: equity and debt.

4. Risk Assessment and Management in Real Estate Finance

Financial risk can be managed in a number of ways. Some solutions are direct, obvious, and achieved by simple act of will. Others involve rather more complex modeling solutions. This chapter addresses the latter. The canonical example of pricing and tub-thumping is a discussion of mortgage spread. What is less visible is that a large measure of the above spread (assuming a mortgage lender can effectively control development risk) is due to a variety of more exact measurement, valuation, and asset-pricing components that range from the ammunition of classic option-like behavior through to the rigor of VaR and regulation. When pricing in private markets is asset (and risk) specific, Michael Tobin’s dramatic exaggeration becomes an article of faith. Limits to arbitrage for instance, in the case of a mortgage become as wide as a death star trench – Table 4.2 – and creaming Mary will be the fate of those who try to traverse them.

4.2 Risk Management

The multiple dimensions of risk must be considered and then measured, should they be quantifiable. In other words, risk is not limited to the price volatility of an asset. To contain a broader and more real-world version of risk, a wide variety of metrics are often used. These can include not only pure objective measures, such as vacancy rates, credit ratings, or the current ratio, but also the opinions of innumerable sources. These can include appraisals, rating agency opinions, probability of default, loss given default, loss in a downturn, and other applied mathematics solutions to assist in the correct estimation of the spectrum of errors into which real estate can slide. As the ambition of the research expands, new areas related to risk can be added, particularly if they add value, such as terms and conditions of mortgage contracts that can eviscerate equity.

4.1 Understanding Risk

5. Case Studies in Real Estate Finance

For example, we find that swaps with two-dimensional nonproportional rate locks, in this instance the combined prepayment model with 10 percent constant prepayment with one-year rate lock on a 7-year, 7 percent rate, $700 million notional, are feasible hedging vehicles for relatively cheap logistic rate locks, and similar linear ratio, price lock linkage because they allow for FAS 109 mark-to-market. The leptokurtic jump component of real estate collateral in commercial mortgage-backed securities, which unnecessarily increases the spread over risk-free government bond rates since its expected return is higher, also makes the triple-B interest rate lock against the pool, which might fall to zero. Given observable interest rate procedures, advance notice becomes available, which unnoticeably reduces the much harder problem of synchronous stochastic rate lock optimization to the convex constraint that long rates fall 200 basis points. More specifically, a negligible call option value can only be preferentially passed-up in favor of rate locks. Another percentage-based rate lock swaps, unlike forward treasury lock swaps for which the difference in current forward rate and rate lock is less than for swaps, can replicate the rounded swaptionlets.

Next, we assume that the issued tranche is a triple-B-rated security, most sensitive to deteriorating collateral. The single debt rating we obtain is nontraditional but not unrealistic, since in the absence of negotiation only the collateral is commonly valued. To incorporate the salient modern commercial real estate securitization features, these case studies assume an exponential jump-diffusion real estate process with the jump-squared diffusive subdivision, and counterparty preprogrammed cash-out through artfully simulated early exercise thresholds defining temporary jump-like payouts.

To demonstrate the modern mathematical techniques of real estate finance, we construct two practical case studies within the Black-Scholes and Lévy model framework. This method extends our previous analysis of pricing mortgage and other asset-backed securities for multiple prepayment preferences, and also complements our earlier investigation of the performance of the Heston/Lévy model for commercial real estate securitizations. Choosing closed-form European and American valuation for easy comparison to previous research, we then more realistically model interest rates and prepayment preferences. The framework includes a robust hypothetical entity as well.