Real Estate Investment Paper Example

Introduction

Real estate investment entails the purchase or rental and management or sale of real estate for instance land to get returns. Real estate is in asset form with limited liquidity which is relative to other forms of investment. This form of investment is one of the preferred methods by most investors since it provides good returns besides cushioning rational investors from the effects of inflation (Riddiough, 2018). Notably, key players in real estate investment comprise; finance institutions like banks, financial regulatory authorities, and the investors. Real estate investment is not "easy to fund investment" hence many investors opt for bank credit as a source of fund. The case revolves around the effects of bank loan of the prices of the real estate asset, as in the case of Japanese real estate boom (Mora, 2008). Moreover, the case also demonstrates the effects of bank lending of prices of assets and the effects of financial deregulation on real estate investment an also shedding some light on varying real estate speculative condition and instances of economic situations and cycles like slump and boom.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

The scope of the problem

The problem has a wide coverage ranging from the effects of bank credit to the prices of real estate properties like land, the effects of financial deregulation to the lending rate and inflation of real estate prices and changing of the financial landscape (Mora, 2008). In addition, the problem also covers speculation on real estate investment and the effects of economic depression (Simpson, 1933).

Analysis of the Outcome and Socioeconomic Consideration

The outcome of the problem reveals that indeed, an excess or huge supply of bank loans increases real estate prices. For instance, the decrease in bank lending of Keiretsu firm in Japan as a result of financial deregulation in 1980 since the firm was now able to raise funds from the public market through bond issuance (Mora, 2008). Consequently, it was an opportunity for many other firms to be less dependent on bank lending. However, in contrast, the banks also reacted by moving away from these firms. Consequently, after the banks lost most of Keiretsu customers, they opted to increase their lending on real estate sector and similarly to change the asset prices like land hence leading to inflation on land prices (Mora, 2008). Hence the borrowing capacity of a firm and its demand for loans will be impacted by the changes in asset prices. An increased socio-economic activity in an economy causes an increase in asset prices and firms will be prompted to borrow more funds since their net worth would have increased as well. In turn, this will increase the demand for land and hence creating an inflationary pressure on land (Mora, 2008).

Moreover, during an economic depression, many banks have collapsed, and have continued to be on the brinks of collapsing as a result of real estate liabilities (Simpson, 1933). It will be conceded by the hypothesis of many investors that, their knowledge economic cycles and the number of liabilities carried by various banks are far from correct (Simpson, 1933). Hence as a result of the collapse of banks due to economic depressions also mean the collapse of real estate investment. These further create speculations among investors who will be shy to invest in real estate as a result of economic depression with a notion that, economic history indeed repeats itself and many banks will opt to adopt selective credit control measures (Simpson, 1933). This is unlike during economic prosperity when speculations are minimal.

Incentives and Role of Credit on the Incentives

Most commonly, tax incentives have been the common incentive that induces investors and various stakeholders to commit their funds in real estate. Moreover, tax incentive has also promoted subsequent economic development and community growth leading to overall economic progress of the entire economy of a country (Turnbull, 2005). Tax credits are an ideal incentive to reduce some of the cost that is associated with real estate investment and promoting overall economic development and progress. Taxes are important component incentive to all investment, and real estate is not an exemption (Turnbull, 2005). Rational investors being wary of these tax incentives since it changes they are perceptive on investing and promoting community development.

The government wants investors to improve community development. This is because many real estate investments are tax deductions when assessing taxable profit of investments. This will prompt many investors to invest in various projects since they will not be feeling the pinch of any tax burden (Turnbull, 2005). Moreover, the government has initiated additional incentives like giving out tax holiday on investments that are taxable after a given period (Turnbull, 2005). Moreover, credit has played an integral part as an incentive for investing in real estate. Through selective credit control measures, the government has specified out certain real estate investment and has given out start-up credit for investors who wish to invest in these projects (Turnbull, 2005). This move has turned out to not only to benefit various stakeholders but also, economic status of the economy

Role of government in developing regulations

The government has put in place different regulatory legislation to ensure the environment of steady economic development. First, the government has put in place laws that have ensured political stability that has attracted even foreign investors (Turnbull, 2005). The government has initiated strict legislation that has minimized political conflict from various political parties which can hamper sound investment in the country (Turnbull, 2005). Besides, economic stability and growth and various political stability legislations are intensively interconnected; hence the government should assure investors of any political uncertainty to create an enabling business environment for investment (Turnbull, 2005). For the government to implement political stability regulations peacefully, political parties who respect the country's constitution and that concede defeat in an election process must exist (Turnbull, 2005).

Moreover, the government can regulate the activities of capital market authorities' bodies that are responsible for regulating the county's investment. These can be achieved by putting in place different laws that govern the operation of the capital markets to avoid the exploitation of various investors in the economy (Turnbull, 2005). Lastly, the government can put in place fiscal policies since they also promote economic stability

Conclusion

In conclusion, real estate investment is a challenging investment accompanied by huge initial capital outlay that investors need to acquire. This prompts many investors to seek external financing, especially from banks. However, recently many firms have shifted from bank borrowing to raising funds through the capital markets hence creating an inflationary pressure on real estate assets like land as a result of the banks' reaction of increasing real asset borrowing. Hence the future of many companies and investors are dependent on real estate investment, and the governments have opted to provide different incentives and legislation to create a stable investing environment.

References

Mora, N. (2008). The effect of bank credit on asset prices: Evidence from the Japanese real estate boom during the 1980s. Journal of Money, Credit and Banking, 40(1), 57-87.

Riddiough, T. J. (2018). Editor's Introduction: Special Issue on Real Estate Investment Trusts. Real Estate Economics. doi:10.1111/1540-6229.12260

Simpson, H. D. (1933). Real estate speculation and the depression. Supplement, Papers, and Proceedings of the Forty-fifth Annual Meeting of the American Economic Association. The American Economic Review, 23(1), 163-171.

Turnbull, G. K. (2005). The Investment Incentive Effects of Land Use Regulations. The Journal of Real Estate Finance and Economics, 31(4), 357-395. doi:10.1007/s11146-005-3288-y