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Paper 1 · Lesson 9 — Real Estate Economics and Valuation

Direct vs indirect reits

Direct property investment vs indirect (REITs / listed vehicles), and why a securities exchange is not a real-estate institution.

2 questionsAnswers & explanations includedFree — no sign-up

Question 1

Ms Rahmat has $400,000 and must be able to convert her holding to cash at short notice, as she may need the money for her mother's medical costs within the year. She is choosing between a strata shop unit and units in a listed real estate investment trust. Her adviser makes four statements, all of them accurate.

Which is most appropriate to her stated concern?

  1. A. No two shop units are exactly alike, whereas the trust's units are identical to one another.
  2. B. A direct purchase attracts stamp duty, legal fees, valuation fees and agency fees, whereas dealing in the trust's units does not.
  3. C. A direct purchase takes around three months to complete, whereas the trust's units sell on the exchange within days.
  4. D. Holding the shop unit would make her responsible for maintaining the building, whereas the trust's manager handles that.
Show the answer and full explanation

Answer: C

The rule. Direct property is illiquid: a transaction takes around three months from agreement to completion. Units in a listed trust are liquid and can be sold on the exchange within days. Where the client's binding constraint is speed of access to cash, liquidity is the point and everything else is secondary.

Why C is correct. Ms Rahmat may need the money within the year. Only C addresses how quickly each holding converts to cash. The other options — all four statements are true. That is what makes the question hard: the task is relevance, not accuracy. - A correctly contrasts heterogeneity with homogeneity. It says nothing about how fast she can sell. - B correctly states the transaction-cost disadvantage. A cheap asset she cannot sell in time does not solve her problem. - D correctly states the management burden. A reason to prefer the trust, but not her reason.

Exam note. When every option is factually correct, the question is asking which one answers what was asked. Return to the client's stated constraint and match to it.

Direct property is illiquid: a transaction takes around three months from agreement to completion →

Question 2

A client who has followed the market closely for a year puts two questions to his agent in the same meeting. First, roughly how long a straightforward private resale takes from the point the parties agree terms to the point the buyer takes the keys. Second, why property is described as an illiquid asset when, as he has just watched over a fortnight, demand for it can visibly move within days of a policy announcement. He suspects the two facts are in tension and wants to know which of them he has misunderstood.

Consider the following statements.

  1. (i) A direct transaction typically takes around three months to complete.
  2. (ii) Illiquidity refers to the time and cost of converting the asset to cash.
  3. (iii) The speed at which sentiment moves and the speed at which a transaction completes are different things.
  4. (iv) Because sentiment moves quickly, property is properly described as a liquid asset.
  1. A. (i), (ii), (iii) and (iv)
  2. B. (i), (ii) and (iii) only
  3. C. (ii) and (iv) only
  4. D. (i) and (iv) only
Show the answer and full explanation

Answer: B

The rule. A direct transaction takes around three months to complete. Illiquidity refers to the time and cost of converting an asset to cash, which is distinct from how fast sentiment moves.

Why B is correct. (i), (ii) and (iii) are correct. (iv) is false — quick-moving sentiment does not make the asset liquid, because liquidity concerns the transaction, not the mood.

The other options.

  • A takes all four, including the contradiction that property is both illiquid and liquid.
  • C carries the false (iv) and drops (i).
  • D pairs the correct (i) with the false (iv).

Exam note. Separate how fast opinion changes from how fast an asset can be turned into money. Only the second is liquidity.

A direct transaction takes around three months to complete →

Practise it under exam conditions

Single questions test whether you know a rule. The paper tests whether you can find it in a scenario, at speed, with three plausible alternatives in the way. Start with the free 20-question half-paper.

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