Abstract
Real asset investment, which is assumed to be worthier than traditional assets in regards to exposure to income volatility, has become central to investment portfolios in financial institutions. However, the features of illiquidity and uniqueness involved in an individual real asset deal require private investors to review the full dimensions associated with the transaction structure. Banks and global credit rating agencies assess the quality of products by relying heavily on qualitative research executed by human insights and experiences. Such an approach ensures the comprehensiveness of the review process but it requires excessive resources in time and money. This study presents an internal rating system that instantly screens features of a deal proposal and provides a rating compatible with the global rating standard. The result shows that the outcomes created by this model are mostly clustered from BBB to BB. These findings match the average ratings for real assets, as determined by global rating agencies, which strengthens the practicality of the proposed model.
Highlights
Investment positions in illiquid real assets, such as real estate and infrastructure, have been growing since the 2008 financial crisis (Choi, 2018)
The study conducted by Heitmann and Davison (2018), where the degree of risk of unrated project finance loans is comparable to that of BBB grade corporate bonds when the project is at the stabilized time and comparable to that of A grade bonds after stabilization, bolsters interest in real assets
An expected return is determined by adding a risk premium, which is inherited from the asset’s uniqueness, to a benchmark interest rate with the same maturity, which is determined in the market
Summary
Investment positions in illiquid real assets, such as real estate and infrastructure, have been growing since the 2008 financial crisis (Choi, 2018). The study conducted by Heitmann and Davison (2018), where the degree of risk of unrated project finance loans is comparable to that of BBB grade corporate bonds when the project is at the stabilized time (usually the first three years) and comparable to that of A grade bonds after stabilization, bolsters interest in real assets. It argues that a high recovery rate of more than 80%, even during economic turmoil, attracts investorsappetites. CBRE (2017), a global real estate consulting firm, reveals the empirical result that the yield trend of BBB shows a similar pattern in the capitalization rate of commercial real estate. M&G Institutional (2017) strengthens CBRE’s argument by presenting a study that observes the stability of spread gap between these two products in the United Kingdom
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