With limitations, for example sudden change in

With reference to
real estate economics, demonstrate through the medium of a case study how an
applied understanding of economics is essential to performing successfully
within the real estate sector.

 

This report shall be aimed at explaining how
economics has a lot of relevance in coloration to performing well in the commercial
real estate sector , and therefore how a deeper understanding of economics
should in theory increase your performance in real estate sectors; however the
theory of economics has its limitations for example a lot of trends can change
in a small amount of time as economics is imperfect and could be explained as
an art in the way of predicting certain trends in future and trying to excel
when these (or if) these trends come into place.

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Before starting this essay it could be said almost
all of this is based on predications and is imperfect as no one can predict the
future and random factors come into play for example recessions and booms and
so on, all that this essay will cover are imperfect and do have many
limitations, for example sudden change in socio-economics can completely change
a market, sending some businesses bust and setting others ahead, for example
paper printing companies have gone down in demand as other substitutes to paper
have came into play such as, emails, computer messaging, ipads, tablets phones
and so on; this being an example of some companies booming and some through
trend changes completely going bust.

 

Commercial
Real Estate:

Commercial Real Estate is the sector this report is
going to be aimed at in terms of economics, Firstly the definition of
Commercial Real Estate is any non-residential property in which is used for
commercial profit, a few examples of this being shopping centres, office
buildings and industrial buildings.

Supply
and Demand: Supply and demand is a simple method of good economics, this can be used
to find the perfect amount of supply to demand to maximise profits, the perfect
amount in this diagram is known as the ‘equilibrium’.

To the right is a diagram showing the effective use
of supply and demand; where the supply and demand cross each other is the
equilibrium; this is where supply and demand are most effective for profit in
terms of quantity, the dotted lines on the picture to the right are the
equilibrium and would suggest where the most effective price and quantity of
the item is.

 

 

How
supply and Demand relate to the Commercial sector:

Every business should be aiming to maximise their
profits to make the most growth and income to further improve their business,
supply and demand have a lot to do with investment in commercial buildings; an
example at the moment could be if the Commercial property a said company wanted
to build are office buildings, then they should scout different locations in
which their supply of office spaces are more in ‘demand’ for example office
space in a place like the centre of London will most likely be a lot more in
demand than office space on the border of Barnsley, if they find a good area in
demand for these office spaces they could charge a larger amount of money in
theory producing more income; compared to building the office spaces in an area
where they are in low demand, in theory you will not be able to charge as much.

 

 

 

 

 

 

 

Cash
flow and its relation to the Commercial sector:

Cash flow in a business is as shown to the
right, the cash flowing into a business will be from capital gained, profits,
and investors, and the cash flow out will be money coming out of the business
such as wages, expenses and bills, this working out as net cash flow. Net cash
flow is the amount of cash balance a business has in a said amount of time.

Before starting an investment it would be
important to make a prediction of cash flow to make sure that the business will
be able to with stand its aims and reach profit so the project doesn’t fall
through and the company go bust.

 A
smart company would look into the demand of said business in that area before
jumping into building it, for example if a shop was being built and used by a
company they should firstly, taking to account the location, and demand should
try and predict their net cash flow and their whole cash flow.

 for
example if the shop has running costs of three-thousand pounds a month (this
being the total outgoings or cash flow out) this including wages, bills and
other expenses, they must make sure that they can make above this per month,
this being through their capital received, their profits and investors, they
should make sure they have a good amount of estimated profit to see if the
investment is worth taking place; if there is not a good amount of garneted
profit then the investment is not worth doing, they should also take into
account the chances of upcoming competition.

Understanding
of Socio-economic factors:

A good understanding of Socio-economics is
critical for noticing trends behaviours and fashions within economics, for the
example take into account that people tend to take to car fashion a lot,
upgrading parts of their cars and repairing parts, this is a big social thing
for people, to want their property to be in good condition, not many want a big
dint in their car and will seek it to get repaired.

An example of good use of Socio-economics
with commercial investment would be industrial buildings, as more technology is
coming out in which is simplifying industrial jobs, in theory more industrial
jobs will be appearing; for example 3D printers have came out where you can
print anything you design on a computer, a company can easily run off of one of
these machines with no skills needed as the machines are expensive and people
will not buy one for a single job, they will go to an industrial worker who
runs a service with one. A good use of economics would be investing in these
industrial units, adding onto this example, more than ever cars are on the
road; a lot more coming out every year and a lot of old cars on the road,
M.O.Ts and repairs are done a lot and are in a good demand and a lot these days
are not able to hold all the work they acquire therefore more pop up all around
since they are in high demand, this putting these units in demand in which will
not for any reason anytime soon drop as we are far away from substitutions from
cars, I feel this would be a very smart investment method on the use of
socio-economics.

 

Macroeconomics:

Macro economics is a piece of economics
that is examined as inflation, price levels, rate of growth, national income
and changes in unemployment. A good understanding of macroeconomics in critical,
for example if you rule out inflation, you will probably notice you’re spending
more, and earning less, when you look into your cash flow; if you do notice
this micro then you would also move your price up a bit where possible, enough
to stay in competition but just to cover the other costs and keep at a steady
profit. If said person has a hotel and charge 40 pound a night for a room, if
they notice the minimum wage goes up 20p, they should realise in result there
will be an inflation and more people will be able to afford this 40 pound stay,
however if this stay is already a ‘cheap’ stay, they may choose to move it up
to 45 pound so they keep up with the inflation and keep their profits in move
with the Country’s economic rate of growth.  

A limitation of this would be if you try to
keep up with inflation rising and you start charging more, people may not go
for your service anymore, or if you keep your service at the price you had it
at, your demand could go up and in that way result you having more money; an
example of this would be if you had spare rooms in your hotel, in theory you wouldn’t
need to raise your price your supply and demand will level out more, in that
way increasing your profits.

 

Overall Limitations:

Above is a picture in which is going to be
used to explain limitations of economics and how it relates to real estate as
this is very important.

The economy is imperfect and is always
changing due to a good amount of factors, some more important than others, and
a lot have been explained above. Timing is said to be everything in economics,
its very hard to see and predict what the future holds in economics, a random
boom can appear, and a smart company will always play their ideas in terms of
the bad event of a recession or a depression, many companies make bad ideas
every year in which can be seen as good at the time but can soon turn into the
worst decision they have ever committed with. For example office spaces have
been built in which have not acquired nearly enough attention and income as
expected, therefore some have been renovated into residential from commercial
to reach the better demand in that area, this could be fault of the company not
looking into the supply and demand in that area, or a sudden change as we just
mentioned above.

Conclusion:

In conclusion it could be said it is very clear
that you need good knowledge on economics, and you can never know too much on
economics when in any sector of real estate, being able to notice patterns,
notice changes in the value of money (inflation), knowing how to maximise your
supply and demand in the most economic way

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