01 Real Estate Market

prof. Paola Mutti

prof. Alessandra Pandolfi

SCHOOL OF

ARCHITECTURE AND

SOCIETY

Master of Science in

Architecture

Master of Science in Architecture

Course of Project Appraisal Politecnico di Milano School of Architecture and Society

Milan, 13th March 2015

Introduction to the project assessment process

INTRODUCTION

TO THE PROJECT

ASSESSMENT

PROCESS

SCHOOL OF

ARCHITECTURE AND

SOCIETY


Architecture

Project Appraisal

Milan

13th March 2015

prof. Mutti prof. Pandolfi

2

Index

Economics and Values

Factors that make the real estate market untypical

Three kinds of environment

Real estate markets principal features

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Economy is the science that studies the economic choices that people do to satisfy needs, that are practically unlimited,

with limited (or even scarce) resources homo oeconomicus

Real estate appraisal (Estimo) is the science that aims to evaluate goods through physical and economic measures,

based on specific postulates

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From Hoepli dictionary:

1. Research method based on the dissection, concrete or abstractdissection, concrete or abstract, of an object

or a concept into its constitutive parts: a. of a philosophical concept, of an

historical period

LANG grammatical analysis, search of the grammatical value of all the

words creating a phrase

| logical analysis, search of the syntactic value of the constitutive parts of a

phrase

| phrase analysis, dissection of the phrase into propositions

2. Proceeding of dissection of a substance or a whole of substances in order

to establish its fundamental characters: blood analysis, urine analysis

chemical analysis, search of the qualitative or quantitative constitution of a

chemical substance

medical analysis, examination of healthy or ill parts of the human body

with a therapeutical purpose

Definitions of Analysis

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From Hoepli dictionary:

1. Action and results of evaluating

Determination of a valueDetermination of a value, of the price of an object: to call an expert for the

evaluation of a plot of land, of a house, of a jewel

Value of what is evaluated: an evaluation, real estate or not, of 100.000 Euros

2. Extensively, approximate calculation: evaluation of profits and losses for the next

management year

Definitions of Evaluation


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1. An estimated value refers to the assessment goal(s)

2. The prediction activity is intrinsically related to all of the

assessment actions

3. A price value is at the basis of the value judgment

4. Assessing means comparing

5. The value judgment must be objective and generally

legitimate, this means it should be formulated referring to the

ordinarity principle

6. The value judgment must be transparent

The postulates

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Appraisal and Values

Assessment principles

Goals Prediction Price Comparing Ordinarity Transparent

Economic principles (core criteria)

Basic principles

Market price Production costs

Secondary principles

Replacement value Transformation value Complementary value Other economic factors

Theorems

Valuation procedures

Valuation models Statistic models

Synthetic models

Direct Parametric Sales comparison

approach

Analytic models Other models Regression analysis

Monoparametric Multiparametric

The postulates

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The Project Appraisal/Assessment is a subject that was created to reply to

the need of controlling the economical unequal distribution referring to

ancient cadastres (preceding the geometrical formulation of the registered

goods) and it identifies different types of values for goods:

1. Costs values

referring to the production and

carrying out activities concerning goods

2. Market values

referring to the exchange activities

concerning goods in a market

3. Price values D meets S


Production costs

Carrying out/construction costs

Technical construction costs

Actual value

Potential value susceptibility

Normal value ordinarity

Complementary value

Project Appraisal

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The price evaluation is a typical market action (D meets S), but, in some

instances, prices cannot be determined by the market itself, that is why

the Project Appraisal sciences work on:

estimation methods and procedures,

through which it is possible to

determine the value of goods (real estate

or not) and of rights on goods (r. of

use, r. of eminent domain, license fee, r.

of way, property r., and so on)

irreproducible goods, that are the

typical objects of estimation procedures

it is difficult to determine a market

price for these goods as meeting point

between D and S

P

Q

D S


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Real estate market

untypical features

Essential features of

the pure and perfect

competition markets


Real estate markets

principal features

demand supply

balance point

QUANTITY

P

R

I

C

E

S

BALANCE PRICE

Supply excess

Demand excess

Average and constant actual prices of new houses (13 main towns)

in Euros per square meter

Constant prices 2005

Actual prices

Eu

ros

per

squ

are

mete

r

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the real estate market is sensibly different from the real estate market is sensibly different from

the ideal model of the perfect and pure competition marketthe ideal model of the perfect and pure competition market

Every assumption about the investment choice in the real estate market

should preliminarily and essentially consider that

Real estate market untypical features

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Homogeneousness and divisibleness (features of the product)

Uniqueness (an only market)

Atomicity (a great number of participants)

Transparency

(immediate availability of information about transactions)

Fluidity

(the participants can easily enter and leave the market)

Essential features of the pure and perfect competition markets

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Heterogeneousness

Transformability

Indivisibility

Viscousness

Fragmentation

Opacity

The environment theories by

K. Popper, S. Mattia

Essential features of the Real estate markets

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Variable distribution of featuresVariable distribution of features

in the space of physical objectsin the space of physical objects

Environment n. 1 (or landscape)

DEFINITION: all the elements, processes and interactions having reference to

the systemic, heterogeneous even if unitary structures and dynamics

that constitute the ecosphere or a part of it

Environment n. 1 is nothing else but the world of physical objects to

which a particular real estate asset belongs

It is easy to limit the environment n. 1 field in order to make it merge to the

real estate structure

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Environment n. 1 is unsettled and processingEnvironment n. 1 is unsettled and processing

The variable distribution of features in the space of physical objects (Environment n.

1) is nothing else but the effect produced from the actions of external factors

(Environment n. 3)

The sign and intensity of these actions vary referring to the specific nature of places.

As a matter of fact, every following configuration depends from the

interactions with different systems that express Environment n. 3

Environment n. 1 is at the same time:

a unique, complex and complete system

an evolutionary process, in which are integrated the spontaneous activities of

Nature and the ones resulting from the action of the human collectivity, in their

historic, material and cultural dimension [Romano, 1994]


Environment n. 1 (or landscape)

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Environment n. 2Environment n. 2ss is not uniqueis not unique

Environment n. 2s (or Subjective perception of landscape)

As it results from a consideration that is completely natural: every

landscape is perceived in different ways, depending from the subject

that examines it

It should be referred to the existence of real mind processes (or

conscious subjective experiences) that determine the construction of

opinions and/or behaviors of the numerous and subjective visions -

that are physical, cultural and social of the objects that form

landscapes

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In most of the occasions,In most of the occasions,

Environment n. 2Environment n. 2ss is not completely definedis not completely defined

Every individual or collective subject creates, as a matter of fact, its own real

world, in the direct, active and selective exploration of a particular physical

environment

This process of decodification of the physical world determines, moreover, the definition of sectorial environments, that should be related to the different

visual interrelations established from every subject to every element or process

belonging to landscapes (active interpretations of codified inputs) [Popper, 1963]

Environment n. 2s not only changes relating to the different kind of landscape and to

the subject that observes it, but it is also the result of different components

In most of the situations, the different subjects do not perceive even the

necessity of its complete definition


Environment n. 2s (or Subjective perception of landscape)

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Environment n. 3 is the resultEnvironment n. 3 is the result of the politicalof the political--legislative, legislative,

demographicdemographic--social, social, culturalcultural--technologic technologic

and economical and economical systemssystems

Environment n. 3 (or Set of the social constructions)

The specific nature of real estate assets influences and increases, as it

is sometimes decisive, the continuously varying influence exercised

from Environment n. 3 to the behaviors of the different stakeholders


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Heterogeneousness

Transformability

Indivisibility

Viscousness

Fragmentation

Opacity

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It depends from the subjective It depends from the subjective values of a particular values of a particular spatial configuration, spatial configuration, depending from several depending from several objectivesobjectives that are that are present at the same time present at the same time and, often, oppositesand, often, opposites

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It depends from It depends from real estate assetsreal estate assets

Heterogeneousness

accessibility

micro-environmental quality

Need to make real estate assets more attractive in the reference market

material

immaterial

economic, social and political-administrative issues

cultural, sociologic, creative e spiritual issues

from economic growth

to sustainability

individual

community

Adversarial nature

weight

vulnerability

vocationsvocations

The suitability to a The suitability to a particular useparticular use should be connected to the should be connected to the anthropic, physical and cultural anthropic, physical and cultural matrixes or matrixes or motivationsmotivations

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Other immaterial kinds of Heterogeneousness

Between other immaterial kinds of Heterogeneousness the ones referred to the variability and dynamicity of legal and fiscal conditions should be included, as they dont influence the determination of the transformability level. Most of these elements could not be absolutely connected to localizations

The character presence or absence of a manager is at the same way immaterial. By the way, it should be mentioned that the purpose or not to obtain incomes of a real estate asset essentially depends from decisions taken on financial criteria or made compulsory from specific law dispositions or even referred to the psychological attitudes

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Heterogeneousness in most of the situations is staggered:

between the specific ordination process to a specific real estate asset

the evolution/re-organization (or the contrary) of the territorial structure

Transformability

In these conditions, the original condition of perfect and positive correlation between the internal quality and the localization importance fails. This phenomenon should be considered, above all, analyzing the variables:

accessibility micro-environmental quality The relative modalities enable the evaluator to define respectively: the new relationships to the central place or places (accessibility) the context in which is actually placed (micro-environmental quality)

ThisThis variablevariable enablesenables toto definedefine thethe adaptationadaptation capabilitycapability ofof thethe totaltotal qualityquality referringreferring toto thethe continuouscontinuous and,and, sometimes,sometimes, radicalradical andand unexpectedunexpected changeschanges inin thethe timetime ofof thethe solicitations/needssolicitations/needs ofof thethe EnvironmentEnvironment nn.. 33 and/orand/or ofof thethe marketmarket

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There are essentially two features that determine the real estate assets indivisibility:

dimension

lasting

Indivisibility

This condition determinesThis condition determines relevant effects in the financial issues relevant effects in the financial issues

The dimensional bond imposes a huge and important investment (lump asset) and only the turning to recent forms of securitization could contribute to the limitation of complications and risks

In the moment in which, to the investment extent, it is supported even by lasting, a huge set of complications becomes clear and understandable

Between these complications there are some elements that are particularly relevant, as:

a) the risk of over-dimensioning and of not setting the product on markets

b) the rigidity in the mobility of consumers

c) the consideration in the long term of the investment

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TheThe actionaction ofof lastinglasting andand toto thethe simultaneoussimultaneous conditioncondition ofof lumplump assetasset shouldshould bebe consideredconsidered quitequite totallytotally asas responsibleresponsible ofof thethe effecteffect ofof limitationlimitation ofof thethe transactionstransactions numbernumber

Viscousness

This phenomenon:

depends also from internalinternal reasonsreasons of most of the investors

is partially influenced from the hugehuge costscosts of legal and intermediation transfers,

factor that really becomes the principal cause of hindrance of fluidity and

conditions of fast portfolio adaptation, as a matter of fact, there are no more

detectable, further, relevant and insuperable hindrance to the entrance or exit from

the market of the different subjects that act as promoters or investors

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TheThe HeterogeneousnessHeterogeneousness factorfactor isis responsibleresponsible forfor thethe formationformation ofof numerousnumerous subsub--marketsmarkets

Fragmentation

The classification of the sub-markets is made for the fundamental distinction of the

anthropic activities:

agricultural

industrial

offices

residential

Every further division should be considered in the constant reference of the laws

of the formation of spatial demand curves

In every situation, at that level the principal elements, that could determine

significant differences in prices, earnings and fluctuations, should be accurately

individuated and studied

This knowledge factor is influenced and influences This knowledge factor is influenced and influences

the knowledge level of the market the knowledge level of the market

01 Real Estate Market

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