Institutional Real Estate Research Articles

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

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.

Das Immobilieninvestment als Determinante für den Strukturwandel im Einzelhandel

Abstract Large-scale retailing is gaining increasing prominence throughout Europe in spite of growing reluctance from city planners. In the research literature, this trend is mainly attributed to changing consumer preferences and retail strategies. Although these are indubitably important drivers of retail change, the emphasis in this article lies on the finding that investment preferences of institutional investors are key reasons for the cyclical patterns observed in these large-scale retail developments. The arguments focus on Germany and the UK. We believe that institutional investors and real estate markets should be given much more consideration in scholarly analyses of retail change than has been the case in the past.

Real Estate Taxes and Fees: Impacts on Urban Land and Housing Development in China

Real estate taxes and fees affect land markets and housing development patterns in significant ways affecting the timing of real estate development, spatial patterns of land development, and the capital intensity of development. This paper examines the economic impacts of real estate taxes and fees in a dynamic framework, with special application to proposed reforms in China. Impacts identified are also relevant for real estate tax and fee reforms more generally in developing countries whose institutional real estate regimes are in transition.

Institutional real estate portfolio diversification in Ireland and the UK

PurposeFew countries have sufficiently long and detailed returns data for real estate to permit sophisticated analysis. This paper aims to examine the potential diversification of private real estate investments using returns data for major regional centres in Ireland and the UK.Design/methodology/approachOptimal real estate‐only portfolios are constructed using total returns, income returns and appreciation returns for office and retail real estate in ten cities within Ireland and the UK. The analysis uses IPD data for the period 1984 to 2002. Total return, income return and appreciation returns are treated as separate asset streams in the modelling of portfolios.FindingsThe results show different risk levels; in particular the income stream carries low risk, whereas the capital appreciation element is much more volatile and risky. Optimal portfolios, office or retail, whether income, appreciation or total returns, indicate that provincial markets perform well and are capable of pushing London out of the optimised portfolios.Research limitations/implicationsLimitations stem from the optimal portfolios being based on return series without a consideration of market depth. Future research will seek to construct weighted portfolios.Originality/valueThe paper constructs optimal portfolios for three scenarios: low return; medium return; and high return across sectors, return streams and major regional centres in Ireland and the UK. The results show that regional centres perform well and can exclude London real estate from optimal portfolios.

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

Outlook 2004: the paradox of real estate capital markets and space markets

AbstractThis paper illustrates why US real estate holds such appeal to the international investment community despite currently weak property market fundamentals. In part, US real estate is an attractive investment alternative because of its low correlation with other asset classes and because real estate demonstrates relatively stable current income returns over time. With up to 40 per cent of the world's institutional quality real estate located within the US, investors can achieve higher returns while taking advantage of the geographic and economic diversification of 60 major markets. In the near term, prospects for stronger real estate returns improve as the US economy strengthens and real estate market fundamentals firm, particulary in comparison to the world's other major industrialised economies. Copyright © 2004 Henry Stewart Publications

Institutional Real Estate Investment in Ireland and Great Britain: Returns, Risks and Opportunities

Executive Summary. This study examines the returns and risks of private real estate investment in the major regional centers of Ireland and Great Britain for the 1981 through 2000 period. Returns for office and retail properties are analyzed at the disaggregate level (income returns and appreciation returns separately), as well as the aggregate level (total returns). Real estate returns are also compared with common stocks, gilts, T-bills and inflation. The results show that real estate in several U.K. regions, but especially in Ireland, offer very competitive returns with compelling risk / return ratios. The analysis indicates that real estate investments in several regions could supply significant diversification in a mixed-asset portfolio context as well as real estate only portfolios.

Real Estate in the Institutional Portfolio

The main objective of this study is to provide international evidence on the discrepancy between suggested and actual allocations to real estate in institutional portfolios, and also to discuss possible reasons for the discrepancy. We use data for the U.S., U.K., Sweden, and Switzerland to investigate the benefits of including real estate assets? both domestic and international? in institutional portfolios. The optimal allocation to real estate is found to be 15% to 20%, and is remarkably stable across countries. The suggested allocations to real estate in institutional portfolios are then compared with the actual institutional holdings in these four countries. The latter are found to be much less than the former, and some possible explanations for the discrepancy are given. The study also reports a substantial home bias in institutional real estate portfolios.

Timing and the Holding Periods of Institutional Real Estate

Literature on investors' holding periods for securities suggests that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with shorter holding periods. In real estate, high transaction costs and illiquidity imply longer holding periods. Research on depreciation and obsolescence suggests that there might be an optimal holding period. Sales rates and holding periods for U.K. institutional real estate are analyzed, using a proportional hazards model, over an 18‐year period. The results show longer holding periods than those claimed by investors, with marked differences by type of property and over time. The results shed light on investor behavior.

VaR

When considering how much leverage to use with a real estate portfolio, a good risk measure is needed to evaluate the risk-reward trade-off. The Sharpe ratio, which is not very sensitive to changes in leverage, masks the very different risk/return combinations created by various levels of debt. The authors argue that Value at Risk (VaR) is a far better and more intuitive risk measure to use when making leverage decisions. VaR shows portfolio managers a concrete amount they stand to lose over a specified time horizon and within a pre-determined confidence interval. As such, it can be used to set an upper limit on the amount of risk that a portfolio manager is willing to take on when applying leverage. The authors explain that the VaR technique is particularly well suited to institutional real estate portfolios because it captures the full extent of risk for investors less willing to exercise the borrower9s put-option and it incorporates information about correlations across property types and regional economies.

Institutional Real Estate Investing Processes, Due Diligence Practices and Market Conditions

Executive Summary. The institutionalization of the real estate capital markets has created a market in which those who put capital at risk are increasingly separated from those who make the investment decisions. Investors expect their investment fiduciaries' actions to be consistent with the prudent man standard, employing appropriate due diligence prior to investing. Effective due diligence can improve the prospects of investment performance and mitigate loss exposure. The findings confirm that more resources are devoted to due diligence during times of difficult market conditions than during times of optimistic expectations. The preponderance of due diligence factors are considered by the institutional investor to be important, indicating that for it to be effective, it must be comprehensively rather than selectively implemented.

Agency Costs and Inefficiency in Commercial Real Estate

Executive Summary. Persistence in partially disaggregated NCREIF returns suggests that the institutional real estate market is inefficient and that the most significant source of market inefficiency is agency cost. A major structural distinction between the stock and real estate markets is the imposition of an agency cost control mechanism on stock portfolio managers by the existence of continuous price discovery in the stock market. Persistence in extreme return behavior distinguishes the effect of multiyear agency cost amortization on real estate returns from the effect of market dynamics subsequent to asset acquisition. The application of persistence tests to real estate return series can form the basis for substitute portfolio controls to compensate partially for the absence of continuous price discovery from the real estate market.

Real estate return correlations: Real-world limitations on relationships inferred from NCREIF data

Correlation estimates for returns between individual properties are subject to large inherent uncertainties due to limits on the amount of data that is likely to be available for the foreseeable future. After allowance for correlation sampling error, it is impossible to distinguish on an ex ante basis between the risk-reduction capabilities of mean-variance portfolio selection models and naive diversification without regard to property type or geographical location. The naive portfolio diversification strategies of typical institutional real estate portfolio managers are rational responses to limitations on the informational content of statistical analyses of historical real estate data.

Risk and Real Estate Investment: An International Perspective

The literature regarding portfolio analysis for institutional real estate investors has until now largely been concerned with benefits associated with naive diversification strategies. In this pape...

A Re-Examination of Real Estate Investment Decisionmaking Practices

Executive Summary. This study attempts to ascertain the extent to which institutional real estate investors use sophisticated decisionmaking practices. It expands on earlier studies by surveying a ...

Why the Efficient Frontier for Real Estate Is “Fuzzy”

Executive Summary. By moving asset allocation models from the classroom to the boardroom, institutional real estate investors are confronted with a number of practical problems. Many of these diffi...