Management in the Built Environment Lesson 6 – Cycle of activities

1. Management in the Built EnvironmentLesson 6 – Cycle of activities

2. Aim of this lecture • Understanding the business cycle • Relationship between business cycle and individual sentiments • Understanding the real estate cycle • Different type of property markets

3. 6 stages of a Business Cycle

4. The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analysing the economy and make better financial decisions. 

6. Investor Sentiment roadmap Complacent investor : Manger Risk. What risk ? Market is going up People who stayed in and have heavy losses “Get me out!” Euphoria - a feeling or state of intense excitement and happiness (Max Risk) Capitulation - the action of ceasing to resist an opponent or demand, surrender Despondency - low spirits from loss of hope or courage; dejection. Depression - a long and severe recession in an economy or market (Max Opportunity)

7. Individual sentiment indicator is strongly correlated with the business cycle • Turning points in economic activity, and has historically predicted the relative performance between major asset classes , including real estate • • Macro and market sentiment mark regimes framework vs we define similar market regimes based on market sentiment, and analyse the performance of major asset classes during market cycles. • Risk appetite can be used in conjunction with leading economic indicators to guide asset allocation decisions. • • Despite their similarity, investor confidence and the economic cycle can depart from one another for prolonged periods of time. • Understanding these divergences can be useful to gauge market exuberance or undue pessimism in the context of economic fundamentals. • • Further, we show that market sentiment can be particularly useful in timing allocations to emerging markets (EM), where investor confidence in institutional/political progress and long-term convergence to developed markets is an important driver of returns. Correlation of Market Cycle to individual sentiments

8. The stock market is the story of cycles and of the human behavior that is responsible for overreaction in both directions - Seth Klarman Seth Andrew Klarman (born May 21, 1957)[2][3] is an American billionaire investor and hedge fund manager. He is known as a value investor, and is the chief executive and portfolio manager of the Baupost Group, a Boston-based private investment partnership he founded in 1982. Rule No 1: Most things will prove to be cyclical Rule No 2 : Some of the greatest opportunities for gain and loss comes when other people forget Rule No. 1 - Howard Marks Howard Stanley Marks (born April 23, 1946) is an American investor and writer. After working in senior positions at Citibank early in his career, Marks joined TCW in 1985 and created and led the High Yield, Convertible Securities and Distressed Debt groups.[2] In 1995, he left TCW and co-founded Oaktree Capital Management. In the 2017 Forbes rankings of the wealthiest Americans, Marks was ranked the #374 richest person in the United States, with a net worth of $1.91 billion

10. IMPORTANCE of UNDERSTANDING REAL ESTATE CYCLE Cycles with reference to the housing market Increased knowledge about cycles to assist to avoid housing stress By investigating levels of housing affordability and understand how the property cycles works, can assist to manage housing affordability in different property sector, and eventually avoid/minimise the impact of a downturn. Some areas or countries may be affected to varying degrees by property cycles and levels of housing affordability Property cycles to be used to avoid housing stress in the residential market. Traditionally cycle research is used to increase returns and avoid downturns in the residential /office and/or business sectors

11. What is a Property Cycle - Definition A property cycle is a sequence of recurrent events reflected in demographic, economic and emotional factors that affect supply and demand for property subsequently influencing the property market. The property cycle has four recognised recurring phases : • Recovery • Expansion • Hyper Supply • Recession

12. Four Phases move in a continuous pattern

13. Real Estate Cycle Chart – activities at each phrase RECESSION RECOVERY HYPER SUPPLY EXPANSION

14. Different Types of Property Cycles Cyclical Linear HYBRID

15. Linear Markets linear relationships between two objects can be called a 'constant of proportionality. Increase in Linear markets are real estate markets with a more “flat” growth curve over time. That is they have a more visually smooth and steady growth with no major spikes or declines. Linear markets are where booms and busts virtually never occur. Some people may call them “boring” markets because of their relatively “lower” annual appreciation rates, but they are happen to be the markets that provide some of the best capitalization rates and cash-on-cash returns!

16. Cyclical Markets A cyclical industry (such as the housing/property market) is the type that's sensitive to the business cycle. That means higher revenues in more prosperous times (economic expansion) and lower in downturns (economic contraction). ... Tend to have larger price moves up and down over the years. ... When conditions are ripe annual housing price gains in these areas can exceed 20 to 30 percent at the cyclical – Roller Coaster ride However, the local booms burn themselves out by pushing prices to unaffordable levels. Commonly known as “bubble” markets because they can appreciate in value so dramatically in a relatively short period of time them come “crashing” down as the economy changes bringing property values back down as quickly as they went up – often at double-digit rates.

17. Hybrid Markets Hybrid markets are areas that have linear, slow-growth characteristics for a period time, followed by periods of moderate cyclical-style appreciation. They never boom quite in extreme prices but they also never need to correct like the more volatile markets either.

18. Comparing Markets Although each market has different characteristics, one is not necessarily better than the other.  Each market offers the real estate investor different levels of appreciation and cash-on-cash returns.  Some investors may not sleep well at night investing in a cyclical market and prefer the pace of a linear market.  While other investors may find a linear market to slow and prefer to see greater appreciation potential.  However, over the long-term appreciation rates in both market types end up being similar. 

20. The complete real estate market cycle seems to have an average duration of about 18 years (a fact observed way back in 1933 by the great real estate market researcher Homer Hoyt), and we have good data for the two full real estate market cycles preceding the one we're in now. Mar, 2019

21. Key takeaways in Lesson 6 • What are the keys words that you have learnt in this lesson • Are the property cycles country specific • Able to see the relationship between cycle and current markets ?