Empoderamiento: una reivindicación colectiva para el mejoramiento de la calidad de vida de las

Tyrrell and Bostwick (2005) maintain that even though the return-risk trade off in real estate assets may be comparable to that in financial assets, pricing mechanisms are different. Financial assets are priced using readily available market information from transaction prices. In real estate markets, operational issues such as disproportionate information holding, differing search costs, and bargaining (Quan and Quigley, 1991) affect how transactions information is transmitted. In financial theory, a pricing mechanism’s efficiency in transmitting market information indicates liquidity. A market that delays in transmitting market information is deemed illiquid. Keogh and D'Arcy (1999) and Byrne et al. (2013) argue that conceiving liquidity in terms of information efficiency fails to acknowledge inherent real estate characteristics which affect the price mechanism. This sub-section reviews real estate and financial assets classification and distinguishing characteristics to understanding the relevance of institutional approaches to real estate markets.

i. Asset Classification

Barth (2006) defines an asset as a resource controlled by the entity because of past transactions and events, and from which future economic benefits are expected to flow to the entity. Greer (1997) defines an asset class as a set of assets that bear some fundamental economic similarities to each other and that have characteristics that make them distinct from other assets that are not part of that class. Assets, as controlled resources, can be classified broadly as real or financial assets.

20

Real assets are tangible goods that can be used to produce [higher order] goods and services, and generate net income to the economy such as commodities and real property (Bodie et al., 2010).

Commodities, as defined by Menger (1981), are economic goods that are in such external circumstances that the intention of their owner to sell them can be easily discerned by anyone.

Real property is land, building and anything permanently attached to land (Harvey and Jowsey, 2003). Commodities can have a central market where they can be displayed, while real property trades in its locations.

Financial assets are intangible assets that derive value from contractual claims on real assets (Rose et al., 2008). These assets are acquired to mitigate short term consumption imbalances, and/or to create wealth in the long term. In a portfolio, asset selection criteria include income stability, capital security, marketability and liquidity characteristics. Such criteria might also be applied to certain real assets where separation of ownership and use has led to the development of investment markets, e.g. commercial real estate markets.

Another way of classifying assets is by relating markets in which they trade to their ability to sell at short notice. Private markets are markets in which assets cannot be sold at short notice and therefore require long investment horizons. Public markets on the other hand are markets where assets can be traded at short notice (Geltner, 2001, Scott Jr, 1994, Ducoulombier, 2007, Banfield, 2014). Table 2-3 below presents some examples of assets classified by type and market.

Table 2-3: Asset classification by type and market

Private Market Public Market

Equity Asset Private Equity, Real Estate Public Equity, REITs, Commodities Debt Asset Bank loans, LBOs Bonds, MBSs

Source: Geltner (2001)

Assets in an investment portfolio are selected on such criteria as income stability, capital security, marketability or liquidity. They could be compared by expected returns and volatility within a market. Liquidity is cardinal when making comparison between markets. Real estate assets tend to have stable income flows and long-term capital appreciation, but are not easy to sell in the short term. By comparison, financial assets can be sold easily but income flows and asset prices are volatile.

ii. Distinguishing Characteristics of Real Estate and Financial Asset

The term ‘real property’ is traced from early English Law that sought to distinguish between

‘real’ and ‘personal’ property. Property was deemed ‘real’ if the court would grant to the dispossessed owner the thing itself and not merely give compensation for loss (Megarry et al., 2012). In other words, there would not be sufficient compensation to the dispossessed owner of real property other than the recovery of the dispossessed thing. The dispossessed owner of

21

personal property may be returned to the thing or alternatively be given compensation. A further distinction between real and personal property is ‘fixity’. Real property is immobile and recoverable. This qualifies real property to be reinstated to the dispossessed owner [by court action] as the disposed ‘thing’ cannot be removed, but remains in its location. Dispossession occurs by actual eviction of the owner from the location of the thing.

With personal property, the ‘thing’ may be taken away from the location where the owner was disposed of it, hence it may not be recoverable. In such an event, the dispossessed owner can only receive compensation. Though real property refers to the intangible bundle of rights that subsist in real estate, and real estate refers to tangible land, and buildings, in conventional usage real estate refers to the bundle of rights, land and building collectively. The definition highlights important distinguishing real estate characteristics, namely, heterogeneity, fixity of location, multiplicity of interests, and indivisibility which are discussed below.

Heterogeneity and fixity of location: The distinction of real estate assets by location, design or workmanship gives real estate unique spatial identity (Maclennan and O’Sullivan, 2012, Marsh and Gibb, 2011) and affects utility. Every real estate asset sold is spatially heterogeneous (Wilhelmsson, 2002) and hence is a different economic good (Engel and Rogers, 1994). Its utility depends also on location characteristics such as amenities, infrastructure, and proximity to employment or clients. Observed transaction prices, therefore, indicate the monetary equivalent of the derived utility from differentiated economic goods (Wyatt, 1997). Hence, even if the market was to be information efficient, transmitted price information would be relevant to the traded assets, but not to other assets on the market.

Multiplicity of interests: The bundle of rights in real estate comprise ownership, use and disposal rights. Ownership and use rights can be held together or separately. A leasehold interest is created when the rights are held separately. Real estate owner-occupier and investment markets are distinguished by the manner use rights are held (Sayce et al., 2009).

Indivisibility and capital requirements: Unlike financial assets which can be traded in small units as desired, direct real estate asset transaction can only trade whole units. Indivisibility contributes to real estate short sale constraint (Kallberg et al., 1996), market entry barriers (Gau, 1987), diversification limits (Ibbotson and Siegel, 1984, Seiler et al., 1999), limitation in capitalisation information (Clayton, 1998), and difficulties of using real estate in index construction (Morrell, 1993, Brown, 1988). Owing to the lumpiness of real estate assets, huge capital sums are required for acquisition, which are often mobilised via external finance. In the housing market, for instance, capital requirements to purchase whole units affect buyers’ tenure choice between owner-occupying and renting to balance consumption demand with affordability (Flavin and Yamashita, 2002, Balta and Ruscher, 2011).