Investors' capital allocation into office and residential markets in ...

Chapter 3
Investment alternatives
3.1 Theoretical overview on different types of investors and
investments.
Real estate asset market or a property market is the market with the ownership of real
estate assets. Real estate assets can be compared to other capital assets as stocks and
bonds. Therefore, property market must be viewed as a part of the larger capital market.
In any type of capital market investors belong to the demand side and investments belong
to the supply side. Before mentioning different types of investments and investors, it
would be necessary to talk about capital markets. The capital markets can be private or
public. “Public markets are those in which small homogeneous units (or “shares”) of
ownership in assets trade in public exchanges in which many buyers and sellers are
generally simultaneously participating in the market with price quotes available for all to
observe. The stock market is the classic example of a public capital market” (Geltner D.,
Miller N., Clayton J., Eischholtz P., 2007: pp.11). Transaction prices of the asset units
which are traded in such markets are reported on a daily basis. There is also a high
liquidity on these types of markets, meaning that it is easy/quick to buy or to sell asset
units at a last quoted price. There is informational efficiency on public markets that is
asset prices are able to respond quickly to the relevant news on the asset value (Geltner
D., Miller N., Clayton J., Eischholtz P., 2007).
According to Geltner et al. “private markets are those in which the assets are traded in
private transactions arranged between individual buyers and sellers who have “found”
each other, often through the aid of brokers” (Geltner D., Miller N., Clayton J.,
Eischholtz P., 2007: pp.11-12). In these markets the whole assets such as an entire
company or property are to be traded in a single transaction. Therefore, the average size
of the individual transactions is larger in private markets compare to the size of
transactions in public markets. Due to the facts mentioned above, the liquidity in private
markets is low compare to public markets, as it takes time for the seller to find a buyer.
Moreover, transaction costs are normally high in private markets. Privately traded assets
are traded less frequently due to the transaction and search costs. Private deals between
the buyer and the seller also influence the nature of the asset price information which is
publicly available (Geltner D., Miller N., Clayton J., Eischholtz P., 2007).
The price of any investment depends on the expectations on economic growth and
inflation. All the investments can be divided into equity (real) investments and debt
(money) investments. Equity (real) investments are linked to the real economy and
protected against the inflation. Shares are an equity investment and their fortunes are
linked to the real economy. This means that shares should provide protection against
inflation, at least over certain holding period. Debt (money) investments are prone to
inflation and linked to the inflation and interest rates. Conventional bonds are a debt
investment; they do not have a direct link to the real economy, and have a fixed income
in nominal terms. However, the nominal discount rate will increase as the inflation
10