Real Estate Finance

MBA, HKU Business School

I. Course Information
Instructor: K. S. Maurice Tse
E-mail: [email protected]
Venue: Admiralty
Dates: March 6 – April 12, 2023
Time: Monday 6:30 pm – 9:30 pm; Wednesday 7:00 pm – 10:00 pm
Demonstrator: Clive HO

II. Course Description and Objectives

Real Estate represents a large fraction of the world's wealth. Its efficient utilization and the markets
in which it is traded involve many interesting and complex economic and policy issues. A proper
understanding of the real estate market is important for individuals to make sound savings and
investment decisions, for businesses to make the right decision on whether to buy or lease a
property, and important for banks to evaluate the asset risks underlying their mortgage loan
portfolios and to innovate real estate related financial products.

The objective of this course is to develop an analytical framework by which students can make sound
real estate investment decisions. The main emphases of the course are on theory, concept building,
financial modeling, and practical application. In particular, class discussion will cover the following
areas in real estate:

• Real Estate Market Analysis

• Mortgage Markets
• Mortgage-Backed Securities
• Real Estate Investment Trusts (REITs)
• Institutional Aspects of Real Estate Investments
• Valuation of Income Producing Properties and Land

Materials and data pertaining to local real estate market will be used throughout the course
whenever possible. Although our discussion will focus on the property market in Hong Kong, the
techniques and concepts discussed apply to any property market outside Hong Kong.

Pre-requisite
Although this course does not specify any pre-requisite necessary for your application for enrolment
in this course, you are supposed to have the basic understanding of the following concepts covered
in the Corporate Finance course:

• Time value of money

• Risk and return tradeoff
• Diversification and portfolio analysis
• Net present value (NPV) and Internal Rate of Return (IRR)
• Cost of capital

Quick review of these concepts will be provided in lecture whenever necessary.

III. Course Learning Outcomes (CLOs)

Upon completion of this course, you should be able to:

1 Understand the nature of the Hong Kong property market and evaluate the supply and demand
conditions of residential properties in Hong Kong.

2 Evaluate the various mortgage products for the financing of real estate properties.

3 Evaluate the risk and return tradeoffs of mortgage-backed securities and understand the nature
and operation of real estate investment trusts.

4 Analyze and evaluate the economic and financial implications of real estate transactions in Hong
Kong.

5 Apply the various valuation techniques to appraise the fair market value of residential and
commercial properties, land, and old properties.

6 Develop your own theoretical view to explain the phenomenon of the real estate market.

IV. Alignment of Programmes and Course ILOs

Program Learning Outcome Course Learning Outcome

1. Acquisition and internalization of business knowledge and CLO1, CLO2
skills in key functional areas
2. Application of business knowledge to solve business CLO3, CLO4, CLO5, CLO6
problems
3. Developing global outlook CLO2, CLO3

4. Mastering communication skills CL6

V. Teaching and Learning Activities (TLAs)

TLA# Content Aligned CLOs

TLA1 Lectures: Instructor will give lectures on major concepts and issues. CLOs 1-6
TLA2 Cases: Students will be asked to solve cases by groups and submit written CLOs 1-6
reports. The objective of the cases is to give students an opportunity to study
in depth about real estate finance and then apply the concepts and tools to
analyzing real-world problems. The written report should demonstrate
students’ understanding of real estate finance by integrating theories and
reality considerations.
TLA3 Tutorials and consultation: CLOs 1-5
The demonstrator will hold tutorial sessions to address students’ questions and
illustrate important examples to highlight major points covered in class.
TLA4 Class participation: CLOs 1-6
Students are encouraged to raise questions in class and actively participate in
the class discussion.

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VI. Assessment
The course grade will be based on participation, individual case write-ups, group case presentation
and a take-home final. The weight distribution is as follows:

1. Class Participation 10%

2. Individual Case Report 10%
3. Group Case Presentation with Group Report 30%
4. Individual Opinions on TWO Cases presented by other groups 10%
5. Take-Home Final Exam 40%

For the three individual case write-ups, 10% of the grade will go to “Is Real Estate Real” and 10%
to the other two cases that you do not present.

VII. Performance Assessment and Marking Rubrics

Grade Standard for Grade
A+ All aspects were addressed and researched in great depth.
A Demonstrates a clear understanding of and the ability to apply and theory, concepts
and issues relating to the topic.
A- Able to clearly identify the most critical aspects of the task and adopt a critical
perspective.
Excellent development of argument and offers a logically consistent and well-
articulated analysis and insight into the subject.
Draws widely from the academic literature and elsewhere whilst maintaining
relevance
All aspects conform to a high academic / professional standard
B+ Most aspects were addressed and researched in depth.
B Demonstrates a good understanding and some application of the theory and issues
B- relating to the topic.
Able to identify critical aspects of the task and adopt a critical perspective.
Some evidence of analysis supported by logical argument and insight into the subject.
Draws on relevant academic and other material.
Most aspects conform to a high academic / professional standard.
C+ Most aspects were addressed and researched adequately.
C Demonstrates a good understanding of the theory, concepts and issues relating to
the topic but limited application relating to the topic.
C- Some argument presented showing some insight but not always consistent and
logical.
Draws upon an adequate range of academic and other material
Most aspects conform to an acceptable academic / professional standard.
D+ Basic aspects were addressed and researched adequately.
D Demonstrates mainly description, showing basic understanding of the topic but no
application.
Little evidence of analysis but no clear and logical argument relating to the subject.
Draws primarily upon course materials.
Limited aspects conform to academic / professional standards.
F Basic aspects were superficial, inadequate or absent.
E/F Demonstrates limited understanding of the topic and draws conclusions unrelated to
the topic.
The written work is not of an academic / professional standard.

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VIII. Academic Honesty and Integrity
Cheating or plagiarism of any kind would result in an automatic F grade for the course plus strict
enforcement of all Faculty and/or University regulations regarding such behavior. Incident(s) of
academic dishonesty will NOT be tolerated.

The University Regulations on academic dishonesty will be strictly enforced. Please check the
University Statement on plagiarism on http://www.hku.hk/plagiarism/.

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IX. Class Schedule
Date and Time Topics, Readings and Cases
Class 1: March 06 (Monday) • Introduction
6:30 pm - 9:30 pm • Topic: Property Market Analysis

Readings:
1. How Institutional Investors Think about Real Estate,
Harvard Business Publishing
2. What Every Leader Should Know about Real Estate,
Harvard Business Publishing

Class 2: March 08 (Wednesday) • Topic: Property Market Analysis

7:00 pm - 10:00 pm
Readings:
3. Time Value of Money: Buy versus Rent

Class 3: March 13 (Monday) • Topic: Bubbles and Crashes, Capital and Property Market
6:30 pm - 9:30 pm
Readings:
4. Housing Investment, Harvard Business Publishing

Class 4: March 15 (Wednesday) • Topic: Financing Real Estate – Mortgage Products

7:00 pm - 10:00 pm

Class 5: March 20 (Monday) • Topic: Securitization of Mortgages

6:30 pm - 9:30 pm

Class 6: March 22 (Wednesday) • Topic: Real Estate Investment Trusts

7:00 pm - 10:00 pm
Readings:
5. Real Estate Investment Trusts

Class 7: March 27 (Monday) • Topic: Real Estate Private Equity

6:30 pm - 9:30 pm • Topic: Real Estate Investments
• Topic: Leverage and Cost of Capital

Reference: Do Real Estate Investors Trade on Momentum ?

Case Discussion
• Is Real Estate Real?

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 Class 8: March 29 (Wednesday) • Topic: Valuation of Incoming Producing Properties
7:00 pm - 10:00 pm • Topic: Valuation of Land and Redevelopment

Readings:
6. Financial Analysis of Real Property Investments
7. Real Estate Finance: A Technical Note

References:
• Jeffrey Fisher, George Lentz, and K.S. Tse, “Valuation of the
Effects of Asbestos on Commercial Real Estate.” Journal of
Real Estate Research, Vol 7, No. 3 Summer 1992, 331-350.
• George Lentz and K.S. Tse, “An Option Pricing Approach to
the Valuation of Real Estate.” Journal of Real Estate Finance
and Economics, Vol 10. No. 2 Spring 1995, 121-144.

Class 9: April 03 (Monday) • Real Estate Debt in Distress

6:30 pm - 9:30 pm • Real Estate Investments

Group Case Presentation

• Working at Workouts: Commercial Real Estate Debt in

Distress (Group 1 and Group 2)

• Baupost Group: Finding a Margin of Safety in London Real

Estate (Group 3)

Class 10: April 12 (Wednesday) • Real Estate Investments

7:00 pm - 10:00 pm • The Role of Real Estate in Endowment Portfolios

Group Case Presentation

• Baupost Group: Finding a Margin of Safety in London Real

Estate (Group 4)

• The Role of Real Estate in Endowment Portfolios: The Case

of Christ Church, Oxford (Group 5 and Group 6)

Textbook and Reading Materials

There is no required textbook for this course. Reading materials for all topics will be handed out in
class and will also be posted on the HKU website for the course. Students are responsible for all
materials.

• Reference: Real Estate Finance and Investments, Bruggeman and Fisher, 12th Edition, Irwin.

Highly Recommended Tool

• Excel Spreadsheet

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Harvard Business School Articles

1. How Institutional Investors Think about Real Estate

2. What Every Leader Should Know about Real Estate
3. Time Value of Money: Buy versus Rent Decision
4. Housing Investment
5. Real Estate Investment Trusts
6. Financial Analysis of Real Property Investments
7. Real Estate Finance: A Technical Note

Cases
1. Is Real Estate Real? Harvard Business Publishing (Individual for everyone one)
2. Working at Workouts: Commercial Real Estate Debt in Distress (Groups 1 and 2)
3. Baupost Group: Finding a Margin of Safety in London Real Estate (Groups 3 and 4)
4. The Role of Real Estate in Endowment Portfolios: The Case of Christ Church, Oxford (Groups 5
and 6)

For group case presentation, the class will be formed into SIX groups of 3-4 students each. Each
group is responsible for analysing and presenting one of the three cases assigned for presentation.

For all others who are not presenting the case, you are required to provide a brief write-up of your
opinions on the case of no more than 2 A4-pages. Your participation by asking questions on the
presentation will be credited with bonus points.

There are 1 individual case report, 2 individual case opinions and 1 group
case presentation with report.

References

1. Lentz, G.H. and K.S. Maurice Tse, “Supply Adjustments to Demand Shocks in the Commercial
Real Estate Market,” Real Estate Economics, vol 27, no 2, Summer 1999, pp 231-262.

2. S. K. Wong, C. Y. Yiu, M. K. S. Tse and K. W. Chau, “Do the Forward Sales of Real Estate
Stabilize Spot Prices?” Journal of Real Estate Finance and Economics, 2006, 32: 289-304.

3. Do Real Estate Investors Trade on Momentum

4. George Lentz and K.S. Tse, “An Option Pricing Approach to the Valuation of Real Estate.”
Journal of Real Estate Finance and Economics, Vol 10. No. 2 Spring 1995, 121-144.

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