Understanding Real Estate (I)

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Sunday, July 27, 2014


WE HAVE talked about real estate a lot of times in our column, but little do we really know what it is all about. So for this short discourse, allow me to share with you the different facets of what real estate really connotes.

The term "real estate" has taken many meanings. One common definition is the land and all improvements on and to the land. Real estate provides the basis of shelter and privacy for the individual and the family. It is also the basis for work and commercial activities. Food, minerals and other agricultural products are extracted from real estate. Cities, provinces and regions are formed by complex and inter-related real estate decisions. How well and how wisely real estate decisions are made determines the health and prosperity of the people and the country.

An understanding should be realized from at least four different perspectives to better know what real estate really connotes:

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1. Real estate is a physical and biological concept. It consists of the earth's surface, mineral, air, vegetation and other tangible elements.

2. Real estate is an economic concept. Each surface unit in the earth has certain relationships and revenue or cost potentials which determine its function as an economic unit of production.

3. Real estate is a legal concept. All land units are subject to certain property rights and limitations enforced by law.

4. Real estate is a social and cultural concept. The way each land unit is used has an impact on the social and cultural environment.

Real Estate as a Physical Concept

Each unit of real estate is comprised of three-dimensional space. This space consists of the land's surface, the space beneath, which theoretically extends to the center of the earth, and space above, which extends to the skies. If the surface unit were square, the space would form an inverted pyramid from the center of the earth stretching into space.

Possession of space described above, gives access to numerous resources. For example, control of the surface gives the possessor use of the topsoil, crops, trees and other vegetation, manmade improvements, water passing on or next to the land and natural features such as hills or scenic views. Control of the subsurface gives the possessor access to various mineral rights: oil, gas, coal, geothermal energy, subsurface water and caves that are directly below the surface unit.

Possession of air space permits the building of high-rise structures, gives access to solar and wind power sources, prevent others from using the space and gives the possessor various other rights enforceable by law. With the advent of air travel, the right to control of air space has been limited to the space that the possessor could reasonably be expected to use. Space above that, is shared with the public.

Ownership of the surface gives the possessor control over several natural elements. Each element may be sold separately without selling the others, thereby increasing the economic worth of the real estate asset. How this may be done will be described in the legal concept of real estate.

Real Estate as an Economic Concept

Real estate is an economic good which satisfies human wants and needs; thus, real estate commands a price. In order for real estate or any economic good to have value, certain elements must present, these are:

1. Demand - is a basic economic term which denotes a qualified buyer who is ready, willing and able to make the purchase. If any or all of the other three elements are missing, then no demand exists. Demand is more than just human desire; it is desire plus purchasing power. Demand for different parcels of land is different. While some parcels are quite actively demanded by potential users, other parcels are of little interest to anyone. Consequently, some real estate commands a higher price than other real estate.

2. Utility - refer to usefulness. The more useful a parcel of real estate is, the more a user is likely to be willing to pay for it. Usefulness, by itself, is not enough to create value. For example, air and water are vital to human needs. However, air and water are ordinarily not scarce. In places where water is scarce, water rights may command a higher price than land.

3. Scarcity - is a relative term. To speak of the scarcity of real estate is to refer to the limited supply of certain types of real estate at particular locations. For example, due to zoning restrictions - memorial park spaces may be very scarce in an urban city, while another location there may be an oversupply of this type of land for such purposes. In determining the scarcity of a good, it is necessary to equate supply and demand. If there is no demand, then there is no scarcity from an economic perspective.

4. Transferability - is the ability to transfer legal rights to real estate. If legal rights could not be transferred from one person to another, no value could result. In determining what real estate will be used and what will be produced on that real estate, it is necessary to mention the economic concept of the factors of production which are: labor, capital, entrepreneurship or management and land.

Economic Location (Situs) - is an important characteristic in determining the success or failure of real estate. The importance of location is due largely to the fact that individuals need specific types of land for specific uses at specific places. A decision as to whether or not a particular land will be used is dependent upon how that parcel fits into the land-use pattern.

For example, the success of a real store is very much dependent on how near or accessible it is to where its customers live. This proximity to a supporting land use is called linkage. Linkage refers to the time and distance cost necessary to reach the supporting facility. If the retail store is too far away from its customers, they will be attracted to a nearer store, or a nearer store will be developed to intercept the customers.

In the case of residential real estate (subdivision projects and condominiums), the good location (situs) typically includes proximity and accessibility to work, school, church, shopping, recreation, entertainment and other facilities. When asked to name the three most important factors in determining the success of real estate, many developers/investors respond, "location, location, and location." (to be continued next week)

Published in the Sun.Star Baguio newspaper on July 28, 2014.

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