Principles of Real Estate

The paper discusses the real estate market in the prism of principle it is based on. The functioning of the real estate market and the relations among its participants are believed to be classified into four groups, each of which is separately covered in the research. The author states that the principles under consideration are interrelated; and understanding the process of their mutual influence is of primary importance for adequate analysis of the current situation on the real estate market.

The real estate market presents a complex of regional and local markets which are significantly different from each other in terms of prices, the level of risk, effectiveness of investment in real estate, etc. The real estate market is an essential component in any national economy, as real estate is key component of national wealth, the share of which makes more than 50% of global wealth. Without the real estate market, there may not be market in general, as for their existence, the labor market, capital markets, and market of goods and services must have or rent appropriate space needed for their activities. According to a number of foreign economists, real estate market is a specific set of mechanisms and principles by which the rights to property and interests related to it are transferred and by which prices are set and space is allocated between competing land use options.

The principle is the fundamental root that underlies any activity. Principles of real estate market functioning can be classified into four groups: 1) user-based principles, 2) principles relating to real estate objects (land, buildings), 3) principles relating to the market environment, and 4) the principle of the best and most efficient usage of property. Further, we’ll discuss the essence of these principles and show that all the groups of principles of real estate market under consideration are interrelated.
User-based principles

The principles based on user’s notions include the principles of utility, substitution, and principle of expectations.
The principle of utility lies in the idea that every real estate object has a value only if it is useful to some investor and can be used to implement certain functions or personal needs, such as using the real estate as an industrial enterprise, hotel, cafe, office , museum, etc. Utility is the ability of the object to meet the needs of the user in a given place and within a given time period (Floyd & Allen, 2008).

The principle of substitution is defined as follows: a rational (typical, reasonable) buyer will not pay for an object more than the minimum prices charged for other similar items of the same utility. The maximum value of the estimated object is determined by the lowest price for which another similar object of equivalent utility can be purchased. In the framework of these representations, the market value of the object is a cost that has arisen on the basis of the actions of informed buyers in the market of comparable real estate with similar physical characteristics and location. The principle of substitution is connected to the concept of “opportunity cost”, i.e., the costs (losses) of the buyer who has refused from alternative variants and invested into the current real estate object (Floyd & Allen, 2008; Jacobus, 2009).

The principle of expectations is associated with the ideas of the real estate user, and goes as follows: the value of the object that brings income is determined by the cash flow expected from the use of the object being evaluated, as well as the amount expected from its resale. Expectation is the determination of the present value of incomes or other benefits that may be received in the future from the owning of the object. It is important for what period of time the expected revenue will be received, since the investor’s dollar today is worth more than the dollar which will be received tomorrow. The process of linking the future incomes in money terms to their present value is called discounting. The principle of expectations is basic in the implementation of the income approach to valuation (Jacobus, 2009).

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