Equity Markets in Real Estate

What are Equity Markets?

Equity Markets, also common referred to as the stock market, is a market in which shares of companies are issued, bought, and sold. Equity markets facilitate the exchange of shares between both institutional and individual investors, and can be executed through multiple exchange platforms.

For publicly-traded companies, the most common exchange platforms are the New York Stock Exchange, Nasdaq, Tokyo Stock Exchange, Shanghai Stock Exchange, and Euronext Europe. In these markets, sellers set ask prices for the shares and buyers bid for such shares. When these two numbers are the same, the trade is approved and a sale occurs. These exchanges are some of the largest equity markets in the world, and facilitate thousands of trades per day.

For private companies that issue stock to employees, the stock can only be traded through an Over-The-Counter (OTC) market. An OTC market is a market in which shares, commodities, or currencies are directly exchanged between two parties.

Common Investors

Investors in equity markets can vary greatly. Institutional investors, which are organizations that invest money on behalf of its clients, typically buy and sell large blocks of equities. Examples of institutional investors would be hedge funds, mutual funds, and endowments.

Individual investors, on the other hand, are non-professional investors who buy and sell equities through brokerage firms or other investment accounts. Unless they have a large amount of liquid capital, these investors do not take up the size of positions that institutional investors do.

Targeted Returns

Targeted Return is a method of pricing a business based on the return the investor wants or “targets”. Targeted returns calculate the price of a potential investment by using  the capital originally invested and the return or profit the investor wants, all while incorporating the time period the investor wants the return in into the calculation. It can be helpful to have an idea in your head of the return you want as an investor. However, one must make sure that their targeted return is feasible otherwise the dollar figured returned for the price will be unreasonable.

Key Investment Drivers

When valuing a company for potential investment, you want to be sure the company is healthy. A quick way to do so is using common ratios to analyze whether you are over or under paying for the company. There are four major ratio categories: profitability, liquidity, debt, and operational efficiency. Each category has multiple ratios that take financial data from the company and calculate ratio figures from them. When looking at the specific price of a stock in an equity market, some of the most common ratios for price analysis are Price/Earnings, Price/ Book Value, Price/Earnings Growth, and Price/ Cash Flow.

Real Estate Equity Markets

When deciding whether to invest in real estate, there are more than just financial factors that one must examine. Some of the more common factors to consider when investing in properties are: population growth, unemployment rate, economic strength of the area, supply and demand, demographics, surrounding infrastructure, vacancy rate, etc. Depending on the industry and type of property, some factors can be more important than others. For instance, a hotel or a retail location is much more concerned with economic strength and population growth of the area than a senior living development.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions about Equity Markets in Real Estate or if he can help you with your modeling needs.