There is no need to comment on the definition or discussion of investment and speculation since much has been done. It is only necessary to look at the English definitions of investment and speculation defined in the real estate field, and it is necessary to know what kind of policies and regulations each country has on such speculation.
A. What is Investment?
– Investment
The Oxford English Dictionary defines “investment” as follows:
“The investing of money or capital; an amount of money invested in some species of property, A form of property viewed as a vehicle in which money may be invested.”
Webster's Dictionary defines 'investment' as follows:
“An expenditure of money for income or profit or to purchase something of intrinsic value. It is the commitment of funds with a view to minimizing risk and safeguarding capital while earning a return, as contrasted to speculation.”
In "Real Estate Appraisal Terminology," jointly published by the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers, an investment is defined as:
“Monies placed in a property normally with the expectation of producing a profit, assuming a reasonable degree of safety and ultimate recovery of principal; especially for long term use, as opposed to speculation.”
The 3rd edition of The Dictionary of Real Estate Appraisal, published in 1993 by the Appraisal Institute (a merger of the American Association of Real Estate Appraisers and the Real Estate Appraisal Association), adopted the same definition except for the last sentence and the mention of Speculation has been deleted, Anyways, the 'Real Estate Appraisal Dictionary' published in 1999 defines investment as follows:
“Monies placed in a property for long-term use, usually with the expectation of producing a profit, assumes a reasonable degree of safety and ultimate recovery of principal.”
Investment Property
The aforementioned Handbook of the Association of Appraisers defined 'investment property' as follows:
“Property which is within itself a business enterprise consisting of all tangible and intangible assets assembled and developed as a single unit of utility for lease or rental (in whole or in part) to others for profit. A type of real property, which is normally purchased in expectation of annual net income and/or capital gain.”
Based on this, 'investment' can be defined as follows:
Expenditure of capital to acquire assets for:
- Capital Security
- Periodic Return / Dividend, and
- Capital Gains or Growth
or all three of the above, at the same time, with minimizing the risk.
What is Speculation?
Speculation
The Oxford Dictionary defines 'speculate' in part as:
“To engage in the buying and selling of commodities or effects in order to profit by a rise or fall in their market value: to undertake, or take part or invest in, a business enterprise or transaction of a risky nature in the expectation of considerable gain…”
and "Speculation" is defined as:
“…. The action or practice of buying and selling goods, stocks and shares, etc., in order to profit by the rise and fall in the market value, as distinct from regular trading or investment; engagement in any business enterprise or transaction of a venturesome or risky nature, but offering the change of great or unusual gain…”
The 'Terminology of Real Estate Appraisal' referred above does not provide a definition for "speculate" or "speculation", but defines "speculator" as:
“A person who speculates, that is, a person who purchases goods, including real estate, in anticipation of sale at a higher market price.”
In general academic fields, "Speculation" is also regarded as "asserting without additional and complete research or evidence.", which slightly differs from the real estate fields' definition.
What is the borderline for Investment?
If so, is it an investment if you purchase land that has a potential development in a few more years in the surrounding area? Or is it speculation? If speculation is defined as trading for a profit in a short period of time, how many years must pass before it can be considered an investment and not a speculation? We can ask so many questions. What one person regards as speculation may be viewed as investment by another.
In this definition, it can be viewed as 'speculative' if the objectives of an investment (purchase) is to later dispose at a 'significantly' increased price. But on the other hand, if it fulfills one of the previously cited purposes (e.g. Capital Security, Periodic Return/Dividend or Capital Gain) or all three, semantics aside, it can be considered an investment.
Isn't it common sense that everyone wants their assets to be safe, producing profits while investing, ti rise in price a lot when they sell? When we purchase land, building, or any kind of properties, it is natural to consider their future value.
If there is a potential/good news for development, every country has forces that speculate. However, everything is driven by the principles of market. Assuming that there is a possibility of development in 5 or 10 years, the price is already reflected in the market and it moves. And the money value should also be considered as the capital is being tied to the land during that period.
For example, if the CPI is about 3% annum, it means that the value of money is depreciating 3% every year. On top of that, if the yield(interest) of GIF or term deposit is 1.5%, the opportunity cost of the money doing nothing tied to a non-producing land is 1.5% and including CPI it becomes 4.5% annually. If the cap. rate of real estate for general investment is assumed at around 5%, owning a piece of land that has only potential for development and no profit is equivalent to losing about 8.0% per year. If owning that land for 10 years, the opportunity cost needs to be compounded and the land value has to be at least 2.5 times of currrent value to compensate such a loss.
In Korea, as there is a land expropriation procedure for public development, etc., farming fields or forests of low value are viewed as speculative objects for future development. And there are various side effects caused by the changes in the system and policies in urban rehabilitation, redevelopment or reconstruction process. It is not easy to see such short-term profit gains from such policy changes or rapid public development in foreign countries sue to private development nature of the process that depends on mostly market.
