Title LM04 Real Estate and Infrastructure IFT Notes.pdf ✅

LM04 Real Estate and Infrastructure 2025 Level I Notes © IFT. All rights reserved 1 LM04 Real Estate and Infrastructure 1. Introduction ........................................................................................................................................................... 2 2. Real Estate Features ........................................................................................................................................... 2 3. Real Estate Investment Characteristics ...................................................................................................... 5 4. Infrastructure Investment Features ............................................................................................................. 5 5. Infrastructure Investment Characteristics ................................................................................................ 7 Summary ...................................................................................................................................................................... 9 Required disclaimer: IFT is a CFA Institute Prep Provider. Only CFA Institute Prep Providers are permitted to make use of CFA Institute copyrighted materials which are the building blocks of the exam. We are also required to create / use updated materials every year and this is validated by CFA Institute. Our products and services substantially cover the relevant curriculum and exam and this is validated by CFA Institute. In our advertising, any statement about the numbers of questions in our products and services relates to unique, original, proprietary questions. CFA Institute Prep Providers are forbidden from including CFA Institute official mock exam questions or any questions other than the end of reading questions within their products and services. CFA Institute does not endorse, promote, review or warrant the accuracy or quality of the product and services offered by IFT. CFA Institute®, CFA® and “Chartered Financial Analyst®” are trademarks owned by CFA Institute. © Copyright CFA Institute Version 1.0
LM04 Real Estate and Infrastructure 2025 Level I Notes © IFT. All rights reserved 2 1. Introduction This learning module covers:  Features and investment characteristics of real estate  Features and investment characteristics of infrastructure 2. Real Estate Features Real estate has two major sectors:  Residential: Includes individual single-family detached homes and multi-family attached units owned by the residents. Residential real estate is the largest sector, making up some 75% of the market globally.  Commercial: Commercial real estate primarily includes office buildings, shopping centers, and warehouses. When residential real estate properties (described above) are owned with the intent to rent, they are classified as commercial real estate. Real Estate Investments Exhibit 1 from the curriculum lists the main features of residential and commercial real estate. Real estate is different from other asset classes in several ways:  Indivisibility – requires large capital investments  Unique characteristics (no two properties are identical).  There are various types of real estate investment alternatives available, ranging from
LM04 Real Estate and Infrastructure 2025 Level I Notes © IFT. All rights reserved 3 relatively liquid investments in stable, income-producing properties to illiquid investments over a long development life cycle spanning the purchase, construction/upgrade, occupancy, and sales phases.  It can be difficult to diversify  Indexes replicating the performance of real estate are not directly investable. Also, the price discovery process in private real estate markets is opaque:  Historical prices may not reflect current market conditions.  Transactions are costly and time consuming.  In some markets transaction activity may be limited due to supply or demand conditions. Because of these unique features, real estate markets are typically fragmented. The local demand and supply conditions determine the value of a property, and local markets can be very different from national or global markets. Real Estate Investment Structures Real estate investing can be categorized along two dimensions: public/private markets and debt/equity based. Exhibit 2 presents the four quadrants for the basic forms of real estate investments with examples: Equity-based investments represent ownership of real estate properties. Ownership can be through sole ownership, joint ventures, real estate limited partnerships, etc. A variation of equity-based investments is leveraged ownership: Assume a building costs $10 million, and you put $3 million of your money and borrow $7 million. This is called leveraged ownership. That is, leveraged ownership is where a property is obtained through equity and mortgage
LM04 Real Estate and Infrastructure 2025 Level I Notes © IFT. All rights reserved 4 financing. If you are investing in a debt-based real estate investment, it means you are lending money to a purchaser of real estate. A classic example is a mortgage loan. This is considered a real estate investment because the value of the mortgage loan is related to the value of the underlying property. There can be many variations within the basic forms:  Direct real estate investing: Involves purchasing a property and originating debt for one’s own account. The major advantages are: control, and tax benefits. The major disadvantages are: extensive time and expertise required to manage the property, the large capital requirements, and highly concentrated portfolios.  Indirect real estate investing: Pooled investment vehicles are used to access the underlying real estate assets. The vehicles can be public or private, such as limited partnerships, mutual funds, corporate shares, REITs, and ETFs.  Mortgages: Represent passive investments in which the lender can expect to receive a predefined stream of payments over the life of the mortgage.  Private fund investing styles: Most real estate private equity funds are structured as infinite-life open-end funds, which allow investors to contribute or redeem capital throughout the life of the fund.  REITs: REITs combine the features of mutual funds and real estate. An REIT is a company that owns income-producing real estate assets. In REITs, average investors pool their capital to invest (take ownership) in several large-scale, diversified income- generating real estate properties. The REIT issues shares, where each share represents a percentage ownership in the underlying property. The income generated is paid as a dividend to the shareholders. The main advantage of the REIT structure is that it avoids double corporate taxation. Normal corporations pay taxes on income, and then the dividend paid from the after- tax earnings are taxed again at the shareholder’s personal tax rate. REITs can avoid corporate income taxes by distributing 90% - 100% of their rental income as dividends. Another advantage is that REITs are more transparent than private real estate markets. The value of the REIT shares is based on the dividend. REIT shares often trade publicly on exchanges. It is a way for individual investors to earn a share of the income from commercial properties (office buildings, warehouses, and shopping malls) without buying them. Risk and return of REITs vary based on the types of properties they invest in. Equity REITs invest in properties outright or through partnerships and joint ventures. The business strategy for equity REITs is simple: Maximize property occupancy rates