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Custom Market Value of Commercial Property essay paper
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The market value of a commercial property is interesting when viewed in terms of monetary policies. This is due to the fact the prices of houses and the value attached to households’ property and its ownership has an effect to household consumption. It has effect also on the actual household savings. Almost over one third of household wealth consists of single-family kind of dwellings. Therefore Saving towards property is one of largest kind of household assets. Property on the other hand serve as a security for loans and that is why, for instance, rise in the prices of commercial property leads to increase in the scope or ability of households to acquire loans. This has an effect on the demand on wider national basis (Christopher 1987). A well operating market for commercial property is also significant to mobility for the commercial property. It also affects labour markets and this in turn becomes significant to prevent subduing growth of the economy. The property price reflects the present value and the expected yield of the property. This value consists of the net operation cost and an anticipated future changes in the property value which is discounted by use of nominal yield kind of curve.
This net operation cost comprise of the income from rent, the operation costs and the difference between the two. Current property price increase may therefore be as a result of an increased net operation cost. It can also be as result of future expectations of the property price increase. It can also be a reduced or fall kind of nominal yielding curve. Though the rent level develops at a pace that is at par to the price of the property, future expectations in the changes in the prices of the property or a modification of the nominal yielding curve can bring corrections in the prices of the commercial property. This explains why the market value of commercial property can rise and fall with time (Kohn 1994).
In a real commercial estate, commercial property is in most cases valued depending on capitalization projection rates which are used as criteria of investment. This can be done through manipulation of algebraic formula shown below:
For instance to value the projection selling price of a commercial apartment giving yearly net cash flow worthy $10,000 and if the projected rate of capitalization is7%, therefore the real asset value is $142,857. This is the value one is supposed to pay so as to purchase it. This is called the direct capitalization and it is used in properties which generate income especially in appraising estates. The benefit of such capitalization way of valuation is the fact that it is not associated to the market approach of appraising commercial property (Lionel, McKenzie & Stefano 1991). Since the market of real commercial estate is insufficient, there need of multiple kinds of approaches that are may be preferred during valuation of a real commercial asset. Capitalization rates especially for related properties and specifically for the so called "pure" income generating commercial properties, are in most cases compared to make sure that the approximated revenue is well valued (Matthews 1959).
Effect of pro-active management on return
Active management is a portfolio kind of management strategy in which the manager develops special investments having in mind the sole aim of outperforming a benchmark index of investment. In such a scenario investors or just mutual funds that aspire not to create an extra basic return over a given index benchmark will in most cases invest in just an index fund that is in a position to replicate closely to the weight of the investment and the index of the returns. Such a case is referred to as passive management. Active management is now the reverse of the passive management described above. This is because for passive management, the manager’s goal is not to outperform the standard index (Hicks 1946).
Generally in proactive management, the manager exhaust the inefficiencies in the market through buying securities like stocks that are not highly valued or through short selling collateral which are highly valued. Such methods can be utilized separately or in a combined form. Depending on the aims of the definite investment portfolio the hedge or mutual fund an active management can also act to bring less risk compared to the standard index. The reducing of risk can be used to develop a good return on investment compared to the benchmark. Active managers make use of several factors and related strategic plans to build up their collection. Quantitative factors like price and earnings ratio (P/E ratios) and PEG ratios can be used. Segment investments which attempt to expect macro economic kind of trends which are long-term. For instance aiming at either energy or housing kind of stocks, and at the same time buying stocks from companies which are temporal or willing to sell at a discounted value. To actively manage the funds the managers use such strategies as merging arbitrage, short term positions, optional writing and allocation of assets to give good returns (Christopher & Bliss 1987).
The performance of a pro-actively managed investment collection usually relies on the managerial skills of the manager and the staff doing the market research. In fact, most of the collection schemes of investment which are managed actively seldom go beyond their counterpart’s index over a given successive duration making the assumption that the index is correctly benchmarked. For instance, Standard and the Poor's Index in comparison to the quarter active scorecard show that only a small percentage of actively managed mutual funds do much better in comparison to Standard and also Poor's index benchmarks. As the duration increases, the % of funds which are actively managed in which the profits go beyond the Standard and Poor benchmarks deteriorate further.
Because of mutual collection funds fee and the related expenses it difficult to make a considerable step. This makes it possible for an active manager or passive manager of a mutual fund to under perform in relation to the standard index and this is regardless of whether the securities which includes mutual funds are performing beyond the standard index. Consequently, many of the people willing to invest are not quite satisfied with the so called standard return. This ensures that there is always a demand for an active management. Also most of the investors consider active management as a good investment opportunity and strategy. This is simply because proactive management leads to increased and improved returns (Modigliani & Miller1958).
Pro-active management improves returns by allowing selection of various investments rather than just investing whole market. There also give Investors various motivations by use of various strategies: They can be cynical due to the efficient market kind of hypothesis, or the kind of believe that most market sectors have low efficiency of developing returns than others. The active managers also may try to avoid risk by investing in areas of low risk which most probably is in high profiled companies instead of in the entire and through this strategy they in a position to improve returns on various investment. On the hand the people investing may decide to take an extra risk of exchanging the chance of getting higher market based returns. Investments which are not that highly related to the actual market are used like a means of diversifying portfolio and thus reducing the overall risk of the portfolio. This ensures that always there are some visible returns across the market (Yee & Kenton 2000).
Most investors may want to acquire a strategy which avoids and underrates some industries in comparison to the whole market and in most cases may consider a pro-active management kind of fund being more in consistent to their specific investment objectives. For example, an employee in a highly growing technology company and who gets stock from the company or stock alternatives like a benefit may consider having no extra funds in that industry as an investment. Most of mutual funds which are actively managed and endorsed with a strong and long term records in most cases invest in the value stocks. Unlike funds which are passively managed and which keep on tracking wide market index like the Standard and Poor 500 invest their money in any securities as long as it falls along that index. It includes both value stocks and the growth. In such a case there is no noticeable improvement of returns. The utilization of funds managed in specific new markets is better and its returns are high than in the ones actively managed in already developed markets (Keith, Ambachtsheer & James 1979).
Contrary to the advantages of active management there are also some disadvantages. For example if the manager managing the specific fund makes a wrong investment selection or decide to follow a theory which is not worthy in managing portfolios ends up making less or no tangible improvement on returns. Also the fees related to active management is higher compared to those related to passive management and this is regardless of whether there is frequent trading or not. An investor who is willing to start investing in a mutual fund which is under active management is supposed to evaluate first the fund's expectations. The data over the decades indicates that most of the actively managed stock funds in the US failed to out do the corresponding stock index which is passive.
The strategies of managing funds actively involve regular trading that generates high costs of transaction which in most instances reduce returns from such funds. Also there is additional short lived capital gaining due to regular trading which presents unfavorable impact on income tax if the funds are being held in an account which is taxable (Rosenbaum & Joshua 2009).
The risk premium of market assets over risk free assets.
In this model of pricing capital is used to determine a theoretical approximate value of an asset for example a given kind of security. It can also be used to determine the return expected on equity as per the model of pricing capital asset. The β parameter usually determines the market risk involved. Therefore the respective investors expect/demand the following:
- The expected return (%) = risk-free return (%) + sensitivity to market risk * (historical return (%) - risk-free return (%))
- the expected rate of returns (%) which is equivalent to the yield on the treasury note closest to the term of your project + the beta of your project or security * (the market risk premium)
- The market risk premium has historically been between 3-5% (Hicks 1939).
Examples where capital values change and where overall return changes
Changes in capital value can occur when; selling of either shares or units by a business or organisations increases the actual total book value. For Book value to raise then the extra shares must be issued at a price relatively higher than the already existing book value. On the other hand the buying of its shares by another business will lower the actual total book value. Also the dividends which are to be paid out can either increase or decrease the book value. Also comprehensive earnings and losses can either increase or reduce the book value. Comprehensive earnings may consist of net income usually derived from either income Statement or opportune cost to be exercised.
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