Institutional Real Estate Investment Research Articles

The restless urban landscape of housing financialization: geographies of residential real estate investment trust expansion in Germany and the United States

ABSTRACT The expansion of Residential Real Estate Investment Trusts (R-REITs) represents an important frontier in the financialization of housing and cities. This paper advances the literature on institutional real estate investment and corporate landlordism by analyzing how and where the 15 largest, publicly-listed R-REITS and REIT-like funds in Germany and the US are growing today. First, we introduce the metaphor of the feeding machine to characterize how key actors like the state, private equity, and exchange-traded funds (ETFs) provide R-REITs with the properties, capital, and imperative to grow. Second, we find four geographical expansion strategies at work: (1) investment beyond mainstream asset classes: from multi-family apartments and single-family rentals to student flats, care homes, and mobile home and recreational vehicle sites, (2) the concentration and consolidation of ownership, through mergers and acquisitions and focused investment in select markets, (3) acquisition across national borders, and (4) institution-led new construction. Despite crucial nuances in individual R-REIT strategies and the housing systems of each country, our comparative analysis reveals shared trajectories and rationalities of expansion. We posit that ETFs and the indexes through which they allocate investment increasingly shape the restless urban landscape of R-REIT growth, pumping liquidity into spatially fixed assets.

The changing position of housing estate neighbourhoods in the Helsinki metropolitan area

This paper addresses the under-researched phenomena of investments in the private rental markets in disadvantaged suburbs in Finland. Despite the application of a social-mixing policy in the Helsinki Metropolitan Area and the Nordic welfare model, suburban housing estate neighbourhoods built in the 1960s and 1970s have experienced a socioeconomic decline since the 1990s. According to several recent large surveys, housing estate neighbourhoods represent the least popular housing environments among Finns. Nevertheless, as the Helsinki Metropolitan Area is currently facing rapid population growth, these neighbourhoods have now become the target for heavy infill development, and ambitious city-led regeneration plans. Simultaneously, housing investment has become an opportunity in Finland for both national and, increasingly, also international real-estate investment companies, as well as for private households. We explore the resurge to invest in housing estate neighbourhoods through two case studies in the Helsinki Metropolitan Area. Using statistics and interviews with policymakers and institutional real-estate investors, as well as a review of policy documents as our data, we show the variegated ways in which the marketization and financialization of housing and urban renewal policies change the social geography of housing estates in the Helsinki Metropolitan Area.

Climate Risk and Real Estate Prices: What Do We Know?

There is a growing international consensus that climate change represents one of the most important structural forces and risks that long-term investors need to proactively consider in building resilient portfolios. Many institutional real estate investors have significant exposure to cities and regions that are economically important but increasingly susceptible to climate change impacts. In this article, we review and synthesize existing academic research on risk exposure to acute and chronic climate-related events and forces and their impacts on property asset values and lending practices. Evidence to date is dominated by studies focused on residential property, although some recent research has begun to examine the commercial real estate sector in a more rigorous way. We draw inferences from the residential studies for how these findings might apply to commercial real estate and highlight the more recent studies focused on commercial property. Recent research is published within both real estate and broader economics and finance journals; these articles indicate that awareness of climate risks is having a more sustained impact on pricing and on investor decision making, although the channels through which impact occurs are generally opaque and warrant further research. <b>Key Findings</b> ▪ Historically, property prices decline after climate events but tend to eventually recover. Recent evidence suggests that climate events in geographies that previously suffered little exposure to extreme weather can lead to a long-lasting decline in prices or liquidity. ▪ Some evidence from residential markets shows that levels of belief in climate change and confidence in government-led mitigation of impacts may result in differing levels of price impacts where risks lie primarily in the future, such as sea level rise. In this respect, the nature of the marginal investor is important. ▪ Commercial owners/investors in some geographies are placing a higher risk premium on all properties in metro areas affected by climate events, regardless of whether their individual properties have been directly affected.

Institutional ownership and REIT acquisitions

ABSTRACT We examine the relationship between institutional ownership and Real Estate Investment Trust (REIT) acquisitions. We find that REITs with relatively higher levels of pre-event institutional ownership are more likely to partake in acquisitions. We additionally find that levels of institutional ownership significantly increase post-acquisitions even after controlling for other relevant factors. This increase is driven by longer-term and passive institutional investors. Further, we find positive influences from the increase in institutional ownership on both market and accounting performance, however, this is driven by increases in short-term and active institutional investor levels. Collectively, our results suggest a significant influence by institutional investment on REIT acquisition decisions that has a significant effect on shareholder wealth.

Creating operational alpha? Operating models for real estate management

PurposeFocussing on the UK’s institutional real estate universe, this paper analyses variations in the operational management of real estate investment portfolios. For the main categories of institutional investors, the key tasks in real estate operational management, and the ways in which these tasks are typically bundled and categorised by investment managers are reviewed. Three broad operational management models are outlined. Case studies of real estate operational management models in practice are discussed.Design/methodology/approachThe research approach is primarily descriptive, drawing upon illustrative investor case studies.FindingsA range of operating models are identified for managing real estate investment portfolios. Specialists real estate investors tend to have highly vertically integrated operating models viewing most operational management functions as core operational capabilities. Multi-asset owners tend to have a vertically disintegrated operating model outsourcing fund, asset, property and facilities management. Investing institutions such as fund houses and specialist real estate investment advisors seem to have converged upon a common hybrid operating model with high margin, analytical functions such as fund and asset management being insourced and low margin, routine functions such as property and facilities management being outsourced.Originality/valueDespite the size of the global, institutional real estate investment universe (estimated by DTZ to be worth more than USD 13.6 trillion in 2015), the topic of how (and how effectively) these assets are managed by institutional investors has attracted very little attention from the real estate research community. This paper provides some initial analysis and insights into operational management models for real estate investment portfolios in the contemporary real estate investment management landscape.

Landmark Buildings and Diversification Opportunities in the Residential Market

Landmark buildings are outstanding constructions recognizable on the basis of their unique design, high visibility and/or extraordinary relevance for the country. Literature on housing markets demonstrates that their price and rent dynamics are not comparable to other types of residential buildings but there are no evidences on the advantages related to their inclusion in a diversified real estate portfolio.The paper, using a database representative of one of countries with the biggest cultural and natural heritage, applies the market portfolio theory for studying the advantages related to a diversification strategy in the residential sector that includes also the landmark investment. Results show that the landmark investment could be a good investment opportunity especially for high risk/return investors and the low correlation of this asset class respect to other types of housing investments implies the existence of a minimum investment on this asset class for almost all the efficient portfolios on the frontier. Empirical evidence supports the hypothesis that institutional real estate investors can take advantage from investing in the landmark buildings also in the residential sector and there are no reasons for limiting the investment to the trophy buildings available in the office and commercial sectors.

Sector, region or function? A MAD reassessment of real estate diversification in Great Britain

PurposeThis paper aims to re‐examine the portfolio risk/return performance of “conventional” sector/regional classifications with one based on socio‐economic criteria.Design/methodology/approachApplying the mean absolute deviation (MAD) portfolio optimisation method, this study revisits sector versus regional diversification within the UK using the Investment Property Databank (IPD) annual data over the period 1981‐2007. A modern functional classification, with data from the 2001 Census, is used to retest the proposition that such groupings may offer superior diversification benefits.FindingsIn line with previous research, sectors dominate regions, however defined, and should be the first level of analysis when developing an optimised portfolio diversification strategy. When the performance of functional groups is compared with “conventional” administrative regions results show that such groupings can provide greater risk reduction. The underlying characteristics of these functional groups may be more insightful and acceptable to real estate portfolio managers in considering assets that a portfolio might contain.Originality/valueReal estate markets are thought to be dynamic, in that their form and content can change dramatically even over quite short periods. This paper shows it is actually rather unlikely that matching changes in the structures of real estate investment portfolios will be observed, even over extended time periods, except at their margins. Although efficient frontiers move across the MAD risk/return space, the relative positions of the sectors and regions hardly change at all in pure analytical terms. In particular, the use of functional groupings, which reflect the greatly changed economic landscape in Britain over some 20 years, do not presage any great change in the pattern of institutional real estate investment, nor even a very obvious improvement in the portfolio performance.

Spatial concentration in industrial real estate

PurposeThis paper seeks to examine the extent of real estate investment concentration in institutional industrial portfolios at these same two points in time.Design/methodology/approachTo examine this issue two datasets are used at two dates, 1998 and 2003. The analysis is confined to England and Wales because of data considerations relating to the availability of comparable data for the rest of the UK. The first dataset relates to floor space and rateable value statistics for the so‐called “bulk classes” of commercial property at Unitary Authority and District (local authority area, LA) level. The more specific institutional real estate investment data for the study come from the IPD analysis “UK Local Markets”. This provides a detailed view of the performance of institutional real estate investment, by sector, in a number of localities across the UK. For the purposes of this study, IPD made data available showing (but with much less detail) other LAs where the number of properties held was greater than zero, but fewer than the four required normally for disclosure. The approach taken is to map the basic data and the results from a standardising measure of spatial concentration – the Location Quotient.FindingsThe findings show that industrial investment concentration is between that of retail and offices and is focused on LAs with high levels of manual workers in areas with smaller industrial units. It also shows that during the period studied the structure of the sector changed, with greater emphasis on the distributional (logistic) element, for which location is a principal consideration. Historically, the sector has provided consistently good total returns with low risk, and was the only sector to expand in terms of numbers of institutionally invested units over the study period. While industrial real estate assets generally do not attract as much capital growth as other sectors, especially in boom periods, rents continued to grow in the period under study. Taken together with the relative resilience in the sector's performance seen over successive cycles, it is not surprising that significant institutional enthusiasm was evidenced.Originality/valueUsing data sets that account for the entire “population” of observations at these two dates the paper demonstrates the relationships between economic theory and the market performance of the sector. The comparisons with the other main sectors also show the differences that would be expected between the sectors, emphasising the point that these markets are dynamic and that their structure, form and content can change dramatically even over quite short periods.

Sustainable property funds: financial stakeholders’ views on sustainability criteria and market acceptance

Sustainable property (real estate) funds (S-REFs) have started to enter international finance markets. An investigation in the German-speaking parts of Switzerland examined two key questions: (1) the sustainability criteria that institutional real estate investors and real estate fund (REF) suppliers regard as important for the market success of S-REFs; and (2) how they assess the market acceptance of such funds. Focus groups were conducted to define sustainability components for S-REFs from a market success perspective. A questionnaire study was then undertaken to assess the two key questions. Factor analysis identified four independent sustainability factors: (1) building materials and energy; (2) expenses, return, and flexibility; (3) green space design; and (4) landscape and natural ecology. In the factor analysis, the set of criteria relating to sustainable social infrastructure did not form an independent factor. In total, 76% of the responding institutional investors decided on an S-REF investment, and 38% reported accepting return shortfalls against the REF benchmark. The market acceptance of S-REFs by institutional investors depends on cognitive drivers, institutional context, age, and family status of investors. These results can inform the design of S-REFs, marketing strategies, and sustainability ratings. Des fonds de placement immobilier durable ont commencé à pénétrer les marchés financiers internationaux. Une enquête effectuée dans les régions germanophones de la Suisse a examiné deux questions clés: (1) les crite`res de durabilité que les investisseurs immobiliers institutionnels et les fournisseurs de fonds immobiliers conside`rent comme importants pour le succe`s commercial des fonds de placement immobilier durable; et (2) comment ils évaluent l'acceptation de tels fonds par le marché. Des groupes de discussion ont été menés afin de définir les éléments de durabilité de ces fonds de placement immobilier durable du point de vue du succe`s commercial. Une étude par questionnaire a ensuite été entreprise pour évaluer ces deux questions clés. L'analyse factorielle a identifié quatre facteurs de durabilité indépendants: (1) les matériaux de construction et l’énergie; (2) les frais, le rendement et la flexibilité; (3) la conception des espaces verts; et (4) le paysage et l’écologie naturelle. Dans l'analyse factorielle, l'ensemble des facteurs liés aux infrastructures sociales durables ne constituait pas un facteur indépendant. Au total, 76% des investisseurs institutionnels qui ont répondu ont opté pour un investissement dans des fonds de placement immobilier durable, et 38% ont indiqué qu'ils acceptaient des pertes de rendement par rapport à l'indice de référence des fonds de placement immobilier. L'acceptation des fonds de placement immobilier durable par les investisseurs institutionnels dépend des facteurs cognitifs, du contexte institutionnel, de l’âge et de la situation de famille des investisseurs. Ces résultats peuvent avoir une influence sur la conception des fonds de placement immobilier durable, les stratégies marketing et les notations de durabilité. Mots clés: principales parties prenantes financie`res, acceptation par le marché, investissement immobilier responsable, crite`res de durabilité, fonds de placement immobilier durable

Spatial concentration in institutional investment in the UK

PurposeGeographic diversity is a fundamental tenet in portfolio management. Yet there is evidence from the USA that institutional investors prefer to concentrate their real estate investments in favoured and specific areas as primary locations for the properties in their portfolios. Work done in the UK, focusing on the office sector, has drawn similar conclusions. The present paper seeks to examine the extent of real estate investment concentration in institutional Retail portfolios in the UK at two points in time; 1998 and 2003, and to present some comparisons with equivalent concentrations in the Office sector.Design/methodology/approachTo examine this issue two datasets are used at two dates, 1998 and 2003. The analysis is confined to England and Wales because of data considerations relating to the availability of comparable data for the rest of the UK. The first dataset relates to floor space and rateable value statistics for the so‐called “bulk classes” of commercial property at Unitary Authority and District (local authority area, LA) level. The more specific institutional real estate investment data for the study come from the IPD analysis “UK Local Markets”. This provides a detailed view of the performance of institutional real estate investment, by sector, in a number of localities across the UK. For the purposes of this study, IPD made data available showing (but with much less detail) other LAs where the number of properties held was greater than zero, but fewer than the four required normally for disclosure. The approach taken is to map the basic data and the results from a standardising measure of spatial concentration – the Location Quotient.FindingsThe findings indicate that retail investment correlates more closely with the UK urban hierarchy than that for offices when measured against employment, and is focused on urban areas with high populations and large population densities which have larger numbers of retail units in which to invest.Originality/valueUsing data sets that account for the entire “population” of observations at these two dates the paper demonstrates the relationships between economic theory and the market performance of the sector. The comparisons with the Office sector also show the differences that would be expected between the sectors, emphasising the point that these markets are dynamic and that their structure, form and content can change dramatically even over quite short periods.

Optimal Diversification in U.S./U.K. Private Real Estate Only Portfolios: The Good, the Bad, and the Uncertain

Executive Summary. This study constructs sixteenmean-variance optimal portfolios of private real estateusing returns from the United States and the UnitedKingdom. First, the analysis uses total returns by propertytype (retail, office, and industrial). Second, the returnsare separated into their two components: returnsfrom income and returns from appreciation. Third, optimalportfolios are constructed by type of return andagain by property type. Finally, all returns are consideredtogether. Several non-obvious and non-trivial resultsemerge. For example, the high risk portfolios usingtotal returns are 100% U.K. for all three property typesand when the three property types are combined, offices,generally regarded as the most popular type of institutionalreal estate investment, never enter the optimalportfolio for either the U.S. or the U.K.

Applying VaR to REITs: A comparison of alternative methods

This study employs five methods to calculate the VaR of twelve REITs portfolios and evaluates the accuracy of these methods. Firstly, we find that the VaR varies among individual portfolios. The Hotel REITs has consistently the largest VaR. The low-leveraging portfolio tends to have the largest VaR measured by the parametric methods, while the high leveraging portfolio has the largest VaR calculated by the non-parametric methods. Secondly, each method performs differently at different confidence levels, and no method dominates the others. At the 95% confidence level, the EWMA method performs relatively well. The EQWMA and the two non-parametric methods perform equivalently and slightly overestimate VaRs. The EQWMA T method ranks the bottom and significantly overestimates VaRs for all portfolios. At the 99% confidence level, the EQWMA method performs the best. The EQWMA T and the two non-parametric methods perform equivalently and may overestimate VaR for all portfolios. The EWMA method turns out to be the worst and tends to underestimate the VaR. These findings may provide more insights for institutional real estate investors.

Institutional Benchmarks for International Real Estate Investment

Executive Summary.Before institutional real estate investors will consider investing in a country other than the domestic economy, they usually require information about expected risks and returns. In recent years the Investment Property Databank (IPD) has begun assembling return data for over twenty countries. This study discusses the data for each country, by property type, and summarizes the returns, risks (standard deviation), and coefficient of variation (risk per unit of return). The results indicate that there are significant diversification benefits from combining real estate investments from certain countries. However, other combinations provide no significant benefits.

The Pricing of Non-Core Real Estate Ventures

The last several years have witnessed a significant shift among institutional real estate investors from “core” deals to “non-core” ventures. These non-core real estate transactions can be characterized as possessing one or more of the following traits: higher-return/higher-risk assets, greater leverage, shorter time horizons, and the use of a joint venture/operating partner. In this article, the author explores the pricing of non-core real estate investing by investigating three key aspects: 1) examining the impacts of financial leverage and demonstrating how the law of one price can be used to price non-core ventures by comparison to the core-with-leverage alternatives, 2) identifying the adverse effects of transaction costs upon investors9 return (which worsen as the holding period shortens and/or the leverage ratio increases), and 3) describing the costs (e.g., because of the asymmetric nature of the operating partner9s promote, computing the expected value of the promote using the venture9s expected return understates the expected value of the promote) and benefits involved with the use of joint venture partners-as well as some of the agency costs these partners introduce. Finally, a preliminary examination of the NCREIF data suggests that the joint-ventured office and industrial properties possibly provided investors with improved risk-adjusted rates of return. However, these conclusions are quite preliminary. <b>TOPICS:</b>Real estate, risk management, volatility measures

Stocks Are from Mars, Real Estate Is from Venus

How does the expected total return, or opportunity cost of capital (the discounted cash flow discount rate), differ across different types and locations of properties? This question is fundamental to institutional real estate investment portfolio and asset management. The cross-section of the long-run investment performance of real estate assets should be related to plausible measures of risk. The authors study this question using original, customized investment performance indexes constructed from the property-level NCREIF Index database. They find that a multi-factor model similar in structure to that of Fama and French predicts quite well the cross-section of long-run performance within NCREIF. But the real estate model is curiously opposite to that of the stock market. Is this an arbitrage opportunity? <b>TOPICS:</b>Real estate, factors, risk premia, portfolio construction

A Quarterly Transactions-based Index of Institutional Real Estate Investment Performance and Movements in Supply and Demand

This article presents a methodology for producing a quarterly transactions-based index (TBI) of property-level investment performance for U.S. institutional real estate. Indices are presented for investment periodic total returns and capital appreciation (or price-changes) for the major property types included in the NCREIF Property Index. These indices are based on transaction prices to avoid appraisal-based sources of index “smoothing” and lagging bias. In addition to producing variable-liquidity indices, this approach employs the Fisher-Gatzlaff-Geltner-Haurin (Real Estate Econ., 31: 269–303, 2003) methodology to produce separate indices tracking movements on the demand and supply sides of the investment market, including a “constant-liquidity” (demand side) index. Extensions of Bayesian noise filtering techniques developed by Gatzlaff and Geltner (Real Estate Finance, 15: 7–22, 1998) and Geltner and Goetzmann (J. Real Estate Finance Econ., 21: 5–21, 2000) are employed to allow development of quarterly frequency, market segment specific indices. The hedonic price model used in the indices is based on an extension of the Clapp and Giacotto (J. Am. Stat. Assoc., 87: 300–306, 1992) “assessed value method,” using a NCREIF-reported recent appraised value of each transacting property as the composite “hedonic” variable, thus allowing time-dummy coefficients to represent the difference each period between the (lagged) appraisals and the transaction prices. The index could also be used to produce a mass appraisal of the NCREIF property database each quarter, a byproduct of which would be the ability to provide transactions price based “automated valuation model” estimates of property value for each NCREIF property each quarter. Detailed results are available at http://web.mit.edu/cre/research/credl/tbi.html.

Perception of Real Estate Investment Opportunities in Central/South America and Africa

Executive Summary.This study examines the attitudes and perceptions of institutional real estate investors towards real estate investment opportunities in Central/ South America and Africa. This research included a survey sent to 1,068 institutional investors (250 investment managers, 601 pension funds, and 217 REITs) who were asked about the characteristics of investors in these markets and the factors influencing their decisionmaking process. The results indicate that these investors are sensitive to higher returns and political stability and that exposure to real estate in Central/South America and Africa is currently extremely limited, although there are some interested investors. It is surprising how little attention has been given to real estate in these areas, despite the relatively high levels of funds flowing into real estate around the world.

How strategic is housing asset management of institutional real estate investors?

PurposeThere is a clear tendency towards more business‐like approaches in the housing sectors in many European countries. The paper attempts to identify these approaches and related techniques with Dutch institutional real estate investors.Design/methodology/approachIt has been investigated how real estate investors in The Netherlands decide about the physical and technical development and the tenure of their housing stock. In‐depth interviews have been held with several large real estate investors, which cover the majority of all dwellings in the sector.FindingsResults show that investment allocations are only partly rationalised and are not in the least based on intuition. In addition, some elements of strategic asset management prove to be less common than we had expected from the commercial nature of these elements.Research limitations/implicationsThe research concentrates on the development of the total portfolio. In future research, individual estates can be selected for case studies, in order to assess to what extent the policies on portfolio level are carried out in practice.Originality/valueThe paper presents recent evidence on the state of professionalisation in the commercial housing sector.

Investment Styles and Style Boxes in Equity Real Estate: Can the Emerging Model Succeed in Classifying Real Estate Alternatives?

Executive Summary. The real estate industry is working to develop a system of “style boxes,” with the recent NCREIF white paper seeking to define “core,” “valueadded” and “opportunistic” styles of investing in private market real estate. This stems from the desire for: (1) a framework to facilitate the investment process; (2) a common language; (3) targeted portfolio strategy and balance; and (4) a simpler search and selection process for advisors. However, where style box use in the public securities industry is based on defining the attributes of a benchmark universe, the institutional real estate investment industry seeks to define boxes based on expected risk / return ranges, and then attempts to define the asset attributes and management activities appropriate to that style. The process varies widely, and likely requires further analysis and systematization before it can be widely useful. Even then, sophisticated consultants will be required as on-going referees.

Institutional real estate investment opportunities in Shanghai

The purpose of this paper is to provide an overview of Shanghai's real estate market and potential opportunities for new foreign entrants. The paper highlights practical principles for institutional investors seeking quick adaptation to an unfamiliar, fast-growing and potentially rewarding market environment. Copyright © 2005 Henry Stewart Publications