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Main Features of Construction and Real Estate Markets.

The real estate market is the interconnected system of the market mechanisms which provides development, transfer, management and financing of real estate. The real estate market represents set of regional and local markets which are significantly distinct from each other on price and risk levels, efficiency of real estate investments and etc.

The price of a construction project can strongly change over time; one of the main reasons is a speculative nature of real estate market. The real estate market is able to accumulate large amounts of money over a relatively short period of time, thereby breaking balance between the flow of goods and money.

As a whole, the characteristics of real estate market are defined:

– imbalance of supply and demand (supply of commodities on real estate market cannot quickly respond to change in demand);

– cyclical nature of real estate market;

– high degree of state regulation;

– increase in real property value with the course of time;

– low liquidity;

– limited number of sellers and buyers;

– low level of researches;

– high level of transaction expenses.

In economics construction and real estate markets are considered as perfect examples of imperfect competition.

Real estate assets and markets are unique when compared to other goods. The two primary characteristics of real estate assets are their heterogeneity and immobility. Because of these two factors, the market for buying, selling, and leasing real estate tends to be localized and highly segmented, with privately negotiated transactions and high transaction costs.

Real estate tends to be heterogeneous – each property has unique features. Age, building design, and especially location combine to give each property distinctive characteristics. Even in residential neighbourhoods with very similar houses, the locations differ. Corner lots have different locational features than interior lots; their access to parks and transportation routes may differ, and the traffic patterns within the neighbourhood create differences. The most influential site and structural attributes of a home are typically observable and amenable to valuation (e.g., pools, bedrooms, and garages). However, information about a property’s location attributes is much more difficult to observe and value because numerous external effects (positive and negative) act upon a land parcel at a given location, and these effects are reflected in the parcel’s value.

Real estate is immobile. Although it is sometimes physically possible to move a building from one location to another, this is generally not financially feasible. The vast majority of structures removed from the land are demolished rather than moved.

Real estate markets usually are localized. Potential users of a property, and competing sites, generally lie within a short distance of each other. For example, competing apartment properties may lie within 15 minutes, or less, in driving time from each other, while competing properties of single-family residences may tend to be within a single elementary school district or even within a small number of similar subdivisions.

Real estate markets tend to be highly segmented due to the heterogeneous nature of the products. Households that search for single-family detached units in the market will generally not consider other residential product types such as an attached townhouse unit or condominium. In addition, real estate is segmented by product price. The same holds true, although to a lesser extent, in the commercial property market. Commercial property markets are segmented by both users and investors. Larger, more valuable commercial properties are often referred to as investment-grade properties, or institutional-grade real estate. This is the segment of the property market targeted by institutional investors such as pension funds and foreign investors. Individual private investors do not typically compete directly with institutional investors for properties.

The localized nature of real estate markets also contributes to segmentation and explains why rents and prices for otherwise similar property can vary significantly across metropolitan markets and even submarkets within a given metropolitan area.

Transactions involving directly held real estate generally are privately negotiated between the buyer and seller. The negotiation process can be lengthy, and the final transaction price and other important details such as lease terms are not usually observable. Because real estate assets are highly heterogeneous and transaction details are not widely available, the time and effort involved in searching, pricing, and evaluating alternative properties is substantial. Transaction costs include both search costs (e.g., time) and actual costs. Thus, the transaction costs involved in the transfer of directly owned real estate from one owner to another are high compared to many other goods and investments. In addition, real estate agents, mortgage brokers, attorneys, and others may be involved in the transaction due to the considerable value of the investment. These services tend to increase transaction costs.