LDM GROUP Investor Presentation

23 23
Investment Strategy
Investment Strategy
and the Concept of
and the Concept of
Market Efficiency
Market Efficiency
LDM GROUP
LDM GROUP
Franklin Templeton Asset Group
Franklin Templeton Asset Group
24 24
Supply, Demand, and the
Price of Real Estate Assets
Demand
Demand
Relationship between market

Relationship between market
price and the quantity of a good
price and the quantity of a good
or service that will be bought per
or service that will be bought per
time period, over the entire
time period, over the entire
range of possible prices
range of possible prices
For real estate assets, demand

For real estate assets, demand
is inversely related to their price
is inversely related to their price
25 25
Figure 2.1
Figure 2.1
26 26
Demand Schedule
Demand Schedule
is the
is the
relationship between price and
quantity;
quantity;
demand curve
demand curve
is the
is the
graphic form of the same
graphic form of the same
information
information
A specific demand schedule

A specific demand schedule
applies only to a defined
applies only to a defined
population vying for a particular
population vying for a particular
class of property
class of property
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Shift in demand
Shift in demand
the entire
the entire
range of relationships between
range of relationships between
price and quantity demanded
price and quantity demanded
changes. Among determinants
changes. Among determinants
of location and shape of
of location and shape of
demand curves for real estate
demand curves for real estate
assets, and of changes in
assets, and of changes in
demand are:
demand are:
Number of prospective tenants

Number of prospective tenants
Changes in operating expenses

Changes in operating expenses
Yields available on other assets

Yields available on other assets
Technology
Technology
Tastes
Tastes
28 28
Figure 2.2
Figure 2.2
29 29
Example
Example
-
-
demand schedule
demand schedule
for downtown office space
for downtown office space
Price changes alter quantity

Price changes alter quantity
demanded
demanded
Decline in after
Decline in after
-
-
tax cash flow
tax cash flow
Market areas become relatively Market areas become relatively

more desirable, drop bidding for more desirable, drop bidding for
downtown property downtown property
Less downtown space purchased Less downtown space purchased

at each possible price per square at each possible price per square
foot foot
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Figure 2.3
Figure 2.3
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Relative Scarcity
Relative Scarcity
Property in abundance
Property in abundance
commands no substantial value
commands no substantial value
Supply is defined as the

Supply is defined as the
the quantity of a product
the quantity of a product
suppliers place on the market
suppliers place on the market
during a specified time period,
during a specified time period,
for all possible prices
for all possible prices
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Supply function differs as

Supply function differs as
specified time period is
specified time period is
lengthened or shortened
lengthened or shortened
Short run
Short run
variations in the
variations in the
supply of real estate placed on
supply of real estate placed on
the market are an individuals
the market are an individuals
perceptions of the relationship

perceptions of the relationship
between market value and
between market value and
investment value
investment value
Long run
Long run
the supply curve of

the supply curve of
real estate is influenced by cost
real estate is influenced by cost
of construction
of construction
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Quantity supplied
Quantity supplied
refers to
refers to
amount of product that will be
amount of product that will be
placed on the market per
placed on the market per
period of time at a specified
period of time at a specified
price
price
Supply
Supply
the relationship
the relationship
between price and quantity
between price and quantity
supplied over the entire range
supplied over the entire range
of possible prices
of possible prices
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Equilibrium price
Equilibrium price
price at
price at
which there will be sufficient
which there will be sufficient
quantity of a product to satisfy
quantity of a product to satisfy
desires of all consumers at that
desires of all consumers at that
price, but with no surplus
price, but with no surplus
remaining on the market.
remaining on the market.
Quantity demanded and
Quantity demanded and
quantity supplied meet at the
quantity supplied meet at the
point where the supply and
point where the supply and
demand functions intersect.
demand functions intersect.
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Figure 2.4
Figure 2.4
36 36
Figure 2.5
Figure 2.5
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Figure 2.6
Figure 2.6
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Market Efficiency and
Profit Opportunities
Markets
Markets
institutional
institutional
arrangements or mechanisms
arrangements or mechanisms
whereby buyers and sellers are
whereby buyers and sellers are
brought into contact with each
brought into contact with each
other. There are not
other. There are not
necessarily physical entities or
necessarily physical entities or
geographical location
geographical location
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Markets
Markets
commonality of
commonality of
product
product
Owner
Owner
-
-
occupant market
occupant market
Renter
Renter
-
-
occupant market
occupant market
Multifamily investment
Multifamily investment
Nonresidential market
Nonresidential market
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Figure 2.7
Figure 2.7
41 41
Range of Markets
Range of Markets
In an
In an
atomistic market,
atomistic market,
each
each
participant is so insignificant
participant is so insignificant
relative to the size of the total
relative to the size of the total
market that he has no
market that he has no
perceptible effect on price, Every
perceptible effect on price, Every
buyer can purchase as much as
buyer can purchase as much as
desired, every seller can sell as
desired, every seller can sell as
much as desired.
much as desired.
In an
In an
absolute monopoly
absolute monopoly
, there
, there
is only one supplier or a good or
is only one supplier or a good or
service for which there are not
service for which there are not
reasonably acceptable
reasonably acceptable
substitutes
substitutes
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Figure 2.8
Figure 2.8
43 43
Price Searchers and Market

Price Searchers and Market
Efficiency
Efficiency
In an
In an
efficient market
efficient market
,
,
information is transmitted quickly
information is transmitted quickly
and without cost, eliminating
and without cost, eliminating
above average profit
above average profit
Time required for information to

Time required for information to
be reflected in price is a
be reflected in price is a
measure of market efficiency
measure of market efficiency
In less efficient market,

In less efficient market,
information is scarce and costly;
information is scarce and costly;
greater degree of price
greater degree of price
searching
searching
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Sources of Market Inefficiency

Sources of Market Inefficiency
Information costly and difficult to

Information costly and difficult to
obtain; comparison shopping
obtain; comparison shopping
expensive and time consuming
expensive and time consuming
High transaction costs prohibit

High transaction costs prohibit
portfolio adjustment
portfolio adjustment
No two properties exactly alike

No two properties exactly alike
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Strategy Implications
Strategy Implications
In atomistic markets,
In atomistic markets,
economic
economic
rent
rent
will be rare and short
will be rare and short
-
-
lived
lived
Less efficient the market,

Less efficient the market,
longer the adjustment process
longer the adjustment process
takes
takes
46 46
Figure 2.9
Figure 2.9

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23 23

Relationship between market

For real estate assets, demand

A specific demand schedule

Number of prospective tenants

Changes in operating expenses

Yields available on other assets

Price changes alter quantity

Market areas become relatively Market areas become relatively

Less downtown space purchased Less downtown space purchased

Supply is defined as the

Supply function differs as

perceptions of the relationship

the supply curve of

Price Searchers and Market

Time required for information to

In less efficient market,

Sources of Market Inefficiency

Information costly and difficult to

High transaction costs prohibit

No two properties exactly alike

Less efficient the market,

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