A direct transaction takes around three months to complete
A worked RES examination question on direct vs indirect reits, from our Paper 1 bank — with the rule it turns on, and why each of the four options is right or wrong.
The question
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.
- (i) A direct transaction typically takes around three months to complete.
- (ii) Illiquidity refers to the time and cost of converting the asset to cash.
- (iii) The speed at which sentiment moves and the speed at which a transaction completes are different things.
- (iv) Because sentiment moves quickly, property is properly described as a liquid asset.
The answer, and why
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.
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