REAL ESTATE ECONOMICS
by Maya Bandolon-Cartojano, REC, REA, REB
PHILIPPINE ASSOCIATION OF REAL ESTATE BOARDS, INC (PAREB)
Gensan-Sarangani REB
A. Basic economic conceptsB. Real Estate economics 1. Market characteristics 2. Demand 3. SupplyC. Real Estate Broker's RoleD. Forecast Variables 1. Residential housing construction 2. Macroeconomic trends a. Inflation Rate Movements b. Interest Rate movements c. Foreign exchange rate movements
TOPIC COVERAGE - 4hrs
Real Estate Economics by MayaCartojano REC, REA, REB
3. Government Macroeconomic Policies (fiscal policy, monetary policy, physical policy - housing & urban development programs, energy & environment programs
E. Factors affecting real estate valueF Philippine Real Rstate Economic TrendsG. Current events
5 April 20152
What is economics?● The study of human interaction● The study of scarcity● The study of resource allocation● The study of production and consumption
BASIC ECONOMICS
Real Estate Economics by MayaCartojano REC, REA, REB 5 April 20153
Needs – things that are necessary for survival
FOODCLOTHES
HOUSING
Real Estate Economics by MayaCartojano REC, REA, REB
BASIC ECONOMICS
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Wants – things not necessary for survival but that add comfort and pleasure to our lives
Real Estate Economics by MayaCartojano REC, REA, REB
BASIC ECONOMICS
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Personal resources – time, money, skills we use to satisfy our wants
Economic resources – the means through which goods and services are produced
Natural resources – raw materials supplied by natureHuman resources (also called labor) - people who work
to produce goods and services.Capital resources (or capital) – the tools, equipment, and
buildings that are used to produce goods and services
Real Estate Economics by MayaCartojano REC, REA, REB
BASIC ECONOMICS
RESOURCES
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The basic economic problem
is
because we have limited resources but unlimited wants.
Real Estate Economics by MayaCartojano REC, REA, REB
SCARCITY
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You have to make a choice. You have P200 and have been invited to a movie with a friend but you also want to buy a new book of your favorite author. You are also trying to save for Palawan trip during Christmas break.
What do you do?
Opportunity Cost: The next best alternative – what a person gives up to
get something.
Real Estate Economics by MayaCartojano REC, REA, REB
BASIC ECONOMICS
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● Macroeconomics: study of the national economy and its segments including national income, output, employment, and growth.
● Microeconomics: study of individual firms and households.
Real Estate Economics by MayaCartojano REC, REA, REB
TWO CATEGORIES OF ECONOMICS
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Real EstateEconomics
General EconomicsPrinciples
and Theory
Real EstatePrinciples
and Practice
A study of people & how their actions affect property values.
• Study that uses economic principles• Micro and macro analysis• Analyzes trends • Considers supply and demand • Links general economic theory and real estate practice
Real Estate Economics by MayaCartojano REC, REA, REB
WHAT IS REAL ESTATE ECONOMICS?
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Basic Economic Principles
Government’s Role in the Economy
Real Estate and the National Economy
Final Real Estate Decision
Investment Analysis
Taxes, Land Usage, and Environmental Controls
Real Estate Market Analysis
Regional and Community Analysis
Real Estate Economics by MayaCartojano REC, REA, REB
STAIRWAY OF REAL ESTATE ECONOMICS
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Residential Real Estate Markets
Real estate economic characteristics1. Fixed supply in short run2. Immobile-Local market is
key3. Long economic life4. Lack of standardization
Key Concept:Short term movements in prices and rents caused by changes in demand, not in supply.
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
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What is a “market”?
● A place where buyers and sellers meet to exchange items of value.
● Competition varies directly with:● Number of buyers ● Number of sellers● Homogeneity of units available● Knowledge by all parties vs. advantage over the
other party to distort price or market activity
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
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Characteristics of the Real Estate Market
● Buyers & sellers are not numerous● Local nature of the market● Number of buyers/sellers for a particular
class of property is usually limited● Number of buyers/sellers is small in
comparison to other commodities
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
5 April 201515
Characteristics of the Real Estate Market
● Real estate is heterogeneous, bulky, expensive● Each property has a different location
that is permanently fixed● Combined land, capital & financing is unique
● Soil, topography, climate unique
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
5 April 201516
Characteristics of the Real Estate Market
● Buyer/Seller knowledge is frequently poor due to● Infrequency of entry into the market● Limited number of comparable bids and offers● Complexity of legal requirements needed to
transfer ownership
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
5 April 201517
Characteristics of the Real Estate Market
● Willingness of buyers/sellers impaired due to● Limited supply of real estate● Limited number of buyers and sellers● Limited financing options for particular
properties● Differences in compulsion to buy by
individuals
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
5 April 201518
Characteristics of the Real Estate Market
● Supply of land is fixed● Land is fixed = fixed supply● Housing units (density) may be increased
● Construction time● Average of 2 years to increase/build
units● Short run: supply limited● Long run: supply may be increased
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
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Rents and Prices: Real Estate Demand Curve
Quantity or Space
Price or Rent
As Price Decreases, Quantity Demanded
Increases& vice versa
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201520
0
P5M
P4M
P3M
P2M
P1M
500 1000 1500 2000 2500
Real Estate Demand● Increase in Demand caused by
● Population● Income● Cost● Government action
Real Estate Economics by MayaCartojano REC, REA, REB
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FORECAST VARIABLES RESIDENTIAL HOUSINGDEMAND VARIABLES1. PopulationNumbers, Owner Occupied, Demography,
Renters2. IncomeEconomic base trends and employment,
Disposable income trends, Discretionary income for speculation and investment
3. CostsCost of household operation, costs of transport
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201522
FORECAST VARIABLES RESIDENTIAL HOUSINGDEMAND VARIABLES4. CreditInterest rates, Loan-to-value ratios, Payback
periods. Borrower qualifications5. Other Factors: Tastes and CustomsSingle family vs. condominiums, Rent vs. buying
Real Estate Economics by MayaCartojano REC, REA, REB
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Real Estate Supply
●Land is fixed●Number of housing units on
land is not fixed.●Increasing supply takes a long
time.
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201524
Short Run & Long Run Supply Curves
Quantity or Space
Price or Rent Short Run
Supply Curve
Long Run Supply Curve
Long Run Supply Curve is more ElasticReal Estate Economics by MayaCartojano
REC, REA, REB5 April 201525
0
P5M
P4M
P3M
P2M
P1M
500 1000 1500 2000 2500
Real Estate Supply● Increase in supply is caused by:
● Construction● Conversion● Demolition● Destruction
Real Estate Economics by MayaCartojano REC, REA, REB
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Forecast Variables Residential Housing
SUPPLY VARIABLES1. Rate of New Construction● Construction Cost● Land Availability● Credit for Construction● Demand for Housing2. Rate of Conversions● Interest rates● Economic base trends● Environmental Constraints
● Coastal controls, Building moratoriums sewer and water
● Planning controls● Zoning, Building codesReal Estate Economics by MayaCartojano
REC, REA, REB
3. Rate of Demolitions● Number of
existing housing units
4. Rate of Destructions● Manmade● Natural
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Assuming a decrease in demand, supply will change:
● As demand falls, vacancies increase● Increased vacancies lead to fall in
rents/prices● More space available at lower cost
● Long term effects of rent/price decrease:● Out-of-pocket costs for least desirable
property● Costs exceed income generated● Abandonment or demolition
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201528
Real Estate Supply is Fixed in the Short-Run
Demand
PriceSupply
Quantity
Rents and Prices change with shift in Demand
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201529
0
P5M
P4M
P3M
P2M
P1M
500 1000 1500 2000 2500
Compare Price/Rents when Demand changes with Fixed Supply
Supply
Demand
Equilibrium
Price
QuantityShort term price changes caused by demand
Fixed Supply
DemandLower Demand
Price
QuantityDecrease in Demand equals Decrease in Price
Old
Price
Quantity
Fixed Supply
Higher Demand
Demand
NewIncrease in Demand equals
Increase in Price/Rent
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201530
Price
Quantity
Old Supply
New Supply
Old Supply
New Supply
Old Price
New Price Same
Demand
Increase in Supply when Demand remains same will lower Price or Rent “Over Building”
Supply * Demand
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201531
If there is an increase in demand
● Increased demand reduces vacancies● Reduction in vacancies increases rents and
prices bid for short-term fixed supply● Those who cannot afford higher rents/prices:
● Share space with others● Move to less expensive property● Increase density and intensity of use
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201532
Inevitable Real Estate Cycles● Characteristics of Real Estate that leads to cycles:
● Large economic and physical size
● Need for debt
● Government regulation
Typical Real Estate Cycle
Construction begins and
accelerates as you move up the curve
while vacancy continues to
decline
Vacancy declining and no construction
Vacancy increases yet construction
continues unable to stop
Vacancy increases at a decreasing rate, some construction
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201533
If there is a decrease in demand
● Increased vacancies● Decline in rents and
prices● Lower rents/prices
leads to:● Moving up to higher
price area● Reduced density
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201534
Assuming an increase in demand, supply will eventually change:
● Profit motive: Demand pushes rents & prices up
● Construction increases (if no growth limits)● Supply overtakes increased demand,
vacancies increase● Vacancies lead to falling rents and prices● Lower rents/prices:
● Difference between building costs/rents/sales narrows
● No longer profitable to buildReal Estate Economics by MayaCartojano
REC, REA, REB5 April 201535
Rent controls● Rents are high because demand exceeds
supply● To rebalance the market:
● Demand must decrease● Supply must increaseRent controls tend to:
• Increase demand by keeping rents low
• Decrease supply by maintaining low rents
• Low returns for investors reduces construction
• Usually politically motivated
Real Estate Economics by MayaCartojano REC, REA, REB
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● Imperfect market compels buyers and sellers to use a real estate professional
● Professional has higher knowledge of legal and technical aspects
Real Estate Market
Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
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Real Estate Broker’s Role● Client/customer rely upon brokers expertise● Be a knowledgeable, ethical broker help
overcome market imperfections:● Updated on increase/decrease in demand & supply● Updated on market trends and transaction details
● Awareness of rents/prices● Advice on available types of profitable
investments● Lead principals through legal complexities
● Give financing sources and alternatives
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201538
Real Estate Sub Markets● Occupancy – The desire to receive direct
services from the property● Investment – The desire to receive services in
the form of a profit● May be non-monetary rewards● Prestige/pride of ownership
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201539
Supply and Demand❑ The Real Estate Asset Market (Property Market)
SupplyInvestors
Wanting to Sell
Demand:Investors
Wanting to BuyMarket
DEVELOPERS BUYERS
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201540
LESSORS
SupplyProperty Owners
(Landlords)
Demand:Property Users
(Tenants)Market
❑ The Space Market
LEASEES
Supply and Demand
Real Estate Economics by MayaCartojano REC, REA, REB
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Real Estate Market
Investment
Occupancy
Residential
Commercial
Office
Industrial
Residential
Commercial
Office
Industrial
Own Rent
Own Rent
Own Rent
Own Rent
Own Rent
Own Rent
Own Rent
Own Rent
1-4 Family
Multi-Family
1-4 Family
Multi-Family
Real Estate Economics by MayaCartojano REC, REA, REB
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Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201543
MACROECONOMIC TRENDS AFFECTING REAL ESTATE VALUE
REAL ESTATE SUPPLY FACTORSo Housing Supplyo New Construction Activityo The Supply of Vacant Land
REAL ESTATE DEMAND FACTORo Populationo Purchasing Power
Real Estate Economics by MayaCartojano REC, REA, REB
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MACROECONOMIC TRENDS AFFECTING REAL ESTATE VALUE
NATIONAL GOVERNMENT ACTIVITYo Housing and Urban Development Programso Energy and the Environmento Government Banking and Monetary Policieso Fiscal Policies
o Physical Policies
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201545
FACTORS AFFECTINGREAL ESTATE VALUE
PHYSICAL FORCES o Natural Resources o Developed Resources
SOCIAL FORCESo Family size and age-group distributiono Neighborhood stability and attitudes about propertyo Population growth, decline, or shifts at the community, regional and national levelso Life-styles and living standards, often combined with other forceso Attitudes about law enforcement, the role of government and individual responsibilityo Attitudes about development, growth and ecologyo Attitudes toward public education
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201546
FACTORS AFFECTINGREAL ESTATE VALUE
POLITICAL FORCESo Zoning and land-use regulationso Building and safety regulationso Environmental protection lawso Police, fire and health protection serviceso Crime preventions, education and recreation serviceso Public works; power, water, transportation, sewers and flood controlo Fiscal policy and taxationo Monetary policy and controlso Government-sponsored urban redevelopment and housing finance programso Regulation of industry and business
Real Estate Economics by MayaCartojano REC, REA, REB
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CONCERNS FOR BOTH SUPPLY AND DEMAND
IMPACT OF INFLATION1. Actions of BSP Reserve2. Speculators seeking gains3. Rates of returns4. Fiscal policy of
government5. Property and income taxes
IMPACT OF ENERGY SHORTAGES1. Transportation: Number of
highways and cost of travel2. Utility rates3. Size of homes
Real Estate Economics by MayaCartojano REC, REA, REB
5 April 201548
Fiscal PolicyRelated to budget,
government expenditure, taxation
Physical PolicyRelated to overcoming
specific problems of the economy
Monetary PolicyRelated to money
supply, exchange rate control and bank rate
control
Macroeconomic Policies
Fiscal Policy
Use of “Government Expenditure”, and “taxation” to manage the economy.
Variables affected by Fiscal Policy in the economy
➢Aggregate demand and the level of economic activity ➢The pattern of resource allocation➢The distribution of income.
Purpose of Fiscal Policy
Stabilise economic growth, avoiding the boom and bust economic cycle
Real Estate Economics by MayaCartojano REC, REA, REB
BIR: Income Taxes Tariffs -Import Taxes & DutiesDBM: Budget Management Fiscal Spending Governement Loans & Payments
50
Physical Policy
Meant to affect only strategic points of the economy
Variables affected by Physical Policy in the economy
➢Price and distribution of specific commodity➢Investment and production➢Foreign Trade
Purpose of Physical Policy
Overcome specific problems such as pricing of particular commodity, shortages or surpluses developing in the economy etc.
Real Estate Economics by MayaCartojano REC, REA, REB
Price QuotasPrice Ceilings/ FloorLabor Laws/RatesSubsidiesProduct Bans
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Fuel PricesInflation RatesInterest Rates
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Monetary Policy
Regulation of supply of Money and Cost and Availability of Credit in the economy
Variables affected by Monetary Policy in the economy
➢Interest Rates➢Liquidity➢Credit Availability➢Exchange Rates
Purpose of Monetary Policy
Maintain price stability, ensure adequate flow of credit to the productive sectors of the economy and overall economic growth
Real Estate Economics by MayaCartojano REC, REA, REB
Interest RatesSavings Available Credit
Market Activity
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Target Variables -Inflation
-Interest rate
-Real GDP
-Employment
-Consumption
-Savings
-Investment
Policy Variables - Money supply- Liquidity conditions
- Inflation
Monetary Policy – Influence
Real Estate Economics by MayaCartojano REC, REA, REB
Policy Instruments Discount Rates (loan fr BSP)- Interest Rates (loan to clients)
- Reserve Requirements
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Real Estate Economics by MayaCartojano REC, REA, REB
REAL ESTATE ECONOMICS
INTEREST RATES - Availability of credit influences RE
Development and RE Market
Available Credit/LoansMore active market
More RE DevelopmentMore RE Buying
Interest RatesSavings
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Real Estate Economics by MayaCartojano REC, REA, REB
LendingPublic Spending
RE BuyingBusiness Investments
Interest RatesSavings
MONETARY POLICIES
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Compare Current Market Indicators
● Number of deeds recorded● Number of loans: conventional, DVA, FHA● Foreclosure rates● Trends in rents and resale prices● Building permits/subdivision activity● Construction costs● Vacancies (utility company; change of address)● New home inventory● Classified section activity● MLS, including price changes● Local population trends● Government housing support programs
Real Estate Economics by MayaCartojano REC, REA, REB
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Boost Economy after 2001 Slowdown / dotcom bubble
Stable IR from 2004 to 2006
Rise in IR to control liquidity, due to Heavy Capital Inflow &
to curb RE Appreciation
IR hikes to curb inflation
IR Cuts to boost Economy
Interest Rates Movement
Real Estate Economics by MayaCartojano REC, REA, REB 5 April 201557
http://www.rgemonitor.com/emergingmarkets-monitor/archive/200806/
Uncontrolled Inflation despite Further IR hikes
IR hikes proved to Be effective
To curb Inflation
Inflation Down on account of global credit crunch
Inflation Movement
Real Estate Economics by MayaCartojano REC, REA, REB 5 April 201558
Interest Rates Movement
Banks to make available more funds& More Efficiency
Real Estate Economics by MayaCartojano REC, REA, REB
Market Driven
Controlled
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Sterilization to Control pesoAppreciation
Exchange Rate Movement
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
CASH FLOW = PASSIVE INCOME
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
RENTAL YIELD is more than
BANK SAVINGS RATE
MORE INCOME
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
LEVERAGE(CAN BE USED AS
COLLATERAL)
BANKReal Estate Economics by MayaCartojano
REC, REA, REB5 April 201563
ADVANTAGES OFREAL ESTATE INVESTMENT
HEDGE AGAINSTINFLATION
INFLATION
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
INFLATION VS.CAPITAL GAIN RATE
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
FLEXIBILITY /EXPANDABILITY
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
DEPRECIATION(HEDGE VS TAX)
TAX
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
POWER OF AMORTIZATION
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OF
REAL ESTATE INVESTMENT
PREDICTABILITY/CONSERVATIVE
Real Estate Economics by MayaCartojano REC, REA, REB
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ADVANTAGES OFREAL ESTATE INVESTMENT
LIFETIMEINVESTMENT
NEW COUPLE
YOUNG FAMILY
MID-LIFE STATUS
RETIREMENT
SINGLE STATUS
Different Lifestyles, Life Cycles, Personal Goals, Levels of Wealth
LEGACY
Real Estate Economics by MayaCartojano REC, REA, REB
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Gross Rental Yields - Philippines Compared to Continent
10.99%
Real Estate Economics by MayaCartojano REC, REA, REB
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House Price Changes, 5 Yrs (%) - Philippines Compared to Continent
Real Estate Economics by MayaCartojano REC, REA, REB
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