FR2106: Evaluating Real Estate Investment as a Diversification Tool

This report provides a comprehensive analysis of real estate as an investment vehicle, examining its qualities, advantages, and disadvantages, particularly its role in portfolio diversification. It discusses the unique characteristics of property investment, such as its immobility, durability, and lack of liquidity, and evaluates whether property serves as an effective diversifier within a multi-asset portfolio. The report also includes a valuation of a rental and office building located at 45 Queen Street, West London, considering factors like location, floor area, and market rental values of comparable properties. The analysis incorporates prevailing market conditions and concludes with insights on the turbulent nature of real estate investment and its current demand.

Running head: INTRODUCTION TO REAL ESTATE INVESTMENT
Introduction to Real Estate Investment
Name of the Student:
Name of the University:
Authors Note:

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INTRODUCTION TO REAL ESTATE INVESTMENT
Contents
Introduction:....................................................................................................................................2
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................5
Part a:...........................................................................................................................................5
Part b:...........................................................................................................................................7
Part c:...........................................................................................................................................8
Part d:...........................................................................................................................................9
References:....................................................................................................................................10

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INTRODUCTION TO REAL ESTATE INVESTMENT
Introduction:
Investment is one of the primary options available to the people in any country to earn
income. United Kingdom is not an exception to the above as most people in the country looks for
better vehicles to make investment. The objective of all investors are mainly to maximize return
on the amount of investment by assuming minimum amount of risk. A brief discussion on the
properties as an investment option in the country shall be made in this document.
Answer 1:
Qualities of property as an investment vehicle:
Investment allows individuals and organizations to earn significant amount of income on
the spare amount remaining in the hands of the individuals and the organizations after meeting
necessary expenditures. There are number of investment vehicles available to the individuals as
well as the organizations in the UK to earn income. Such vehicles include investment in shares
of companies, investment on debt securities of companies, investment on government bonds,
investment in fixed deposits of banks and financial institutions, investment in properties (real
estate) and others investments. Different investment vehicles have some similar and some unique
characteristics (Omokhomion, Egbu and Robinson, 2018). The investors must take into
consideration these characteristics before determining the suitable products of investments to
achieve their desired objectives. Thus, the final decision as to the particular investment vehicle
that an investor shall chose to invest will be mainly dependant on the objectives of the investor.
For example an investor who is willing to take significant amount of risk in order to maximize
his investment will never chose government bonds, debt securities, fixed deposits and other such

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stable investment options which provide low but stable rate of return on investment. Similar old
pension earning individuals in the country will not be willing to take any excessive risk to earn
high rate of return on their investment. Hence, such people will obviously chose more
conservative investment options such as fixed deposits, government bonds and other such
investment options (van Loon and Aalbers, 2017).
Property is an aggressive investment vehicle which require significant amount investment on the
part of the investors thus, one of the main characteristics of property investment is the
requirement of funds. Investors who invest in shares of companies, in government securities, in
government bonds, in debt securities of companies, in fixed deposits and other investment
options can invest even with low amount of funds. However, in order to invest in properties the
investors require significant amount of funds. With modest funds it will not be possible for the
investors to invest in real estate and properties (Crook, Henneberry and Whitehead, 2015).
The properties in the UK are of different qualities and the investors must take all necessary
precautions to ensure that the properties that they are looking to invest in are of substantial
qualities to earn maximum amount of return on such investment. The investment vehicle, i.e.
property in the country has undergone number of ups and downs over the years. Once a gold
digger for the investors has lost significant amount of its moo to provide the investors high rate
of return. It is mainly due to the ever increasing price of investment properties in the country that
has resulted in stagnation of demand in the property and real estate sector (Baum, 2015). As a
result the investors are increasingly finding it difficult to sale properties subsequent to buying
these properties. Thus, investors have become much more conscious of investment in properties
in the country. The prices of properties have showed a sharp increase over the years resulting in
loss of demand for the properties in the country. However, despite significant stagnation in

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demand of properties in the country there are still huge number of investors looking to invest in
properties simply due to the securities provided by such investment. The basic qualities of
property are as following which must be given necessary importance while taking a decision on
whether to invest in the property or not.
I. Immobile.
II. Durable.
III. Lack of liquidity.
IV. Cost of transaction is very high for investment in property.
V. Heterogeneous (Salem and Baum, 2016).
Diversification is one of the most effective means used by the investors to manage the risk in
investment portfolio. Investment in properties and real estate must be considered after
understanding the various qualities of investment property as enumerated in the earlier
paragraph. A property generally requires significant amount of investment thus, a majority of
funds of an investor will be blocked in case such investment decides to investment in real estate
properties (Brook, 2016). Thus, the ability of the investor to diversify his investment portfolio
will be adversely affected subsequent to the investment in real estate properties. Instead using
such funds to invest in number of other vehicles including investment in shares and securities of
corporations, investment in corporate and government bonds, investment in debt securities and
other investments will help the investor to truly achieve diversification. Hence, property is not a
good diversifier for the investors to achieve diversification in the overall portfolios.
A multi asset portfolio is one that has different vehicles of investment. The investors generally
have significant amount of assets of varied type in such portfolios. Even in such multi assets
portfolios it would be extremely difficult to achieve diversification as significant portion of funds

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will be required to invest in real estate properties. Thus, whether it is multi asset portfolio or any
other kind of portfolio investment in real estate properties will not be helpful in achieving
optimum diversification (Scarrett and Osborn, 2014).
Answer 2:
Part a:
The value of a property as well as its rental value are mainly dependant on number
factors including the place in which the property is located apart from obviously, the area of the
property, the condition of the property, the type of the property, i.e. whether the property is for
residential or commercial purpose, is it a commercial property, in case the property is a
commercial property then whether there is active business is which is being carried on in
investment properties. In addition issues such as tenant problems, arbitrage issues, whether the
property has a lift or not, the closeness of the property to schools, colleges, rail stations and other
such landmarks also help in improving the price of the property (Blackledge, 2017).
In this case a rental and office building situated at the 45 Queen Street of West London is up for
sale and the investor is looking to get recommendation as to the price of the property that can be
paid to acquire the property. However, before assessing the market value of the investment
property a brief discussion on the estimation of current market rental value of the property. In
order to determine the market rental value of a property, the best available source of information
is the information about the market rental value of similar properties in the same location.
However, in case the property is one of a kind and no such or even remotely close properties
exist in the same location then similar properties from neighbouring location shall be used as one
of the key yardsticks to determine the market rental value of the property (Isaac and O’Leary,
2011). As per the information a similar shop with similar size has been let at a rental of £1,200

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per square meter. A better positioned shop though smaller in size commands higher rental with
£1,500. Taking into consideration the above, the market rental value of the unit can be assumed
is calculate below.
Market rental value
Net floor area of the property 450 Square
metres
Current rent payable 250 pert square
The market rental value (250x450) 112,500.00
Market rental value
Net floor area of the property 450 Square
metres
Current rent payable 1200 pert
square
The market rental value (250x450) 540,000.0
0

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INTRODUCTION TO REAL ESTATE INVESTMENT
Part b:
The market value of a property is dependent on the following elements:
Location of the property: Location of the property is one of the most important aspects to be kept
in mind while determining the price of the property. The prime location will attract premium
price whereas not so premium location will have properties at significantly low cost.
Space in the property: Obviously the area and space of the property is one of the most important
determinants in deciding the market value of a property. The bigger the area the higher the price
of a property (Isaac and O’Leary, 2012).
Number of rooms: The number of rooms in a property will have significant influence on the
market value of the property. A closer look about the data of properties will enable us to
understand the impact of number of rooms on the price of the property.
As can be seen in the above that the market value of the property in West London will be
significantly influenced with the number of rooms in the property. The market value of
properties in West London is ranged between ₤87,500 and ₤11,950,000. Since, there is not
significant information available about 45 Queen Street, London. As per the information
provided in the document the value of the property has been calculated below in the organization
(Sayce et. al. 2008).

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INTRODUCTION TO REAL ESTATE INVESTMENT
The market value of the property calculated on the basis of the 4.2% net yield has been
calculated by using the following formula.
The market rental value of the property / the number of years of the property. As per the
information only one property with similar size has been sold six months ago with 5% yield.
Assuming that the inflation rate has been set off against the increase in the pricing of the
properties thus, the market value of the property would be as following:
Market rental value
Net floor area of the property 450 Square
metres
Current rent payable 250 pert square
The market rental value
(250x450)
112,500.00
Yield 5%
Market value 2,250,000.00
Part c:
Introduction:
The value of a property is dependent on number of factors such as the location of the property,
the floor area of the property, the type of the property and other factors. All the factors must be

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INTRODUCTION TO REAL ESTATE INVESTMENT
taken into consideration while determining the market value of a property. In this case the market
value of 45 Queen Street, West London has been computed after taking into consideration all the
relevant factors.
Valuation advice and reasoning:
As per the information provided about the property in West London it is clear that the floor area
of the property is 450 square meter. The information also suggests that in recent six months only
one similar property has been sold on a yield of 5%. Assuming same rate of yield the value of the
company has been calculated by using nominal rental $250 per square metres as $350 per square
meter of rental value was for similar property with lift. Since no lift is available in this property
hence, it has been assumed that the low rate of $250 per square meter is justified to calculate the
market value of the property (Shapiro Mackmin and Sams, 2013).
Conclusion:
Thus, the location of the property as well as its floor area and other available information about
similar properties sold in the area within last 6 months have been considered in determination of
the market value of the property at 45 Queen Street West London.
Part d:
As per the latest reports there has been significant turbulent in real estate investment in the
country. However, the demand for the real estate properties in the country has always been high.
The market price of average properties have ranged between $50,000 and $12,000,000 and in
some case even beyond. Thus, considering that a 450 square feet floor area is available at West
London with only major constraint is that the property does not boost of a lift is obviously a

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profitable investment opportunity provided the investor take decisions accordingly (Jowsey,
2011).
Thus, with only ₤2,250,000 as the estimated market value of the property it seems a very sound
investment opportunity for the investor. Hence, the investor should invest in the property (Myers,
2016).

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INTRODUCTION TO REAL ESTATE INVESTMENT
References:
Baum, A., 2015. Real estate investment: A strategic approach. Routledge.
Blackledge, M., 2017. Introducing Property Valuation Routledge
Brook, M., 2016. Estimating and tendering for construction work. Routledge.
Crook, T., Henneberry, J. and Whitehead, C., 2015. Planning gain: Providing infrastructure and
affordable housing. John Wiley & Sons.
Isaac, D and O’Leary, J., 2011. Property Investment Palgrave Macmillan
Isaac, D and O’Leary, J., 2012. Property Valuation Principles Palgrave Macmillan
Jowsey, E., 2011. Real Estate Economics Palgrave Macmillan
Myers, D., 2016. New Economic Thinking and Real Estate Wiley Blackwell
Omokhomion, I., Egbu, C. and Robinson, H., 2018. Corporate governance and investment
decision-making in real estate investment trusts (REITs). Available at:
http://researchopen.lsbu.ac.uk/2540/ [Accessed on 3 December 2018]
Salem, M. and Baum, A., 2016. Determinants of foreign direct real estate investment in selected
MENA countries. Journal of Property Investment & Finance, 34(2), pp.116-142.
Sayce, S., Smith, J., Cooper, R and Venmore-Rowland, P (2008) Real Estate Appraisal: from
Value to Worth Blackwell
Scarrett, D. and Osborn, S., 2014. Property valuation: The five methods. Routledge.
Shapiro, E. Mackmin, D. and Sams, G (2013) (11th Edition) Modern Methods of Valuation,
Estates Gazette – Routledge