Property Portfolio Research Articles

On Indexing Commercial Real Estate Properties and Portfolios

Commercial real estate indices play an important role in performance evaluation and overall investment strategy. However, the issue of how representative they are of the returns on portfolios of commercial properties is an open issue. Our study addresses this topic by analyzing a sample of 12,427 repeat sales transactions between Q4 2000 and Q2 2011. We find that the aggregate real estate indices (Moody’s REAL CPPI) do a good job of tracking real returns when portfolios of more than 20 properties are considered. At this level, tracking is somewhat less effective than our benchmark of the S&P500 and its component stocks. Compared to the average root mean squared deviation (RMSD) from one asset, randomly selected portfolios with 20 assets reduce the RMSD by 75 % for the S&P500 compared to 66 % for the aggregate index. These results suggest that the aggregate indices can be effective in hedging and evaluating the performance of direct real estate investment. We further find that tracking at the property type level provides little benefit over using an aggregate index. However, indexing using a property type and location matched index provides lower tracking error for any level of diversification.

Prime versus secondary real estate: when to buy and sell

Purpose – The paper aims to assess property returns using yield differentials for prime and secondary properties as a real estate decision‐making tool. It seeks to demonstrate how property portfolios can be optimized through rational stock selection within the respective sectors identified in the IPD Index.

Putting public value at the heart of cultural excellence: Exploring a transformational journey of workplace strategy at the BBC

The arrival of a new Director General and Chairman of the BBC Trust in 2004, together with the eighth BBC Charter, which came into operation from 1st January, 2007, heralded a new era for the BBC and prompted a fresh approach to the property portfolio. The Charter, which runs for ten years, contained a number of new commitments that aimed to redefine the Corporation's role as a public service provider. BBC Workplace is playing a pivotal role in supporting the BBC's efforts to deliver public value. This paper outlines the transformational journey taken by BBC Property/BBC Workplace to develop an intelligent real estate strategy that empowers the Corporation to deliver high-quality, original content, drive innovation, support challenging new technologies and engage a global audience. Today, the BBC's real estate portfolio comprises 207 properties and 571,000m2 of space across the UK. Over the last decade, the BBC Property/BBC Workplace teams have focused on an intense programme of portfolio optimisation to deliver the Corporation's vision of ‘public value’, while ensuring flexibility and innovation to attract and retain the best creative talent. This paper will explore lessons learned from four milestone projects in the BBC Property/BBC Workplace journey towards a new, more intelligent, real estate strategy.

Valuing Real Estate as Dividend Paying Stock with a Put-Option

Option pricing theory is familiar in the property market with studies that consider the methodology for the pricing of mortgages, development land, idle time, property stocks, lease options and other optionality with regards to design or use. It has not, to date, been generally considered as an alternative pricing method for income producing property as a financial investment.This study conceptualises investment property as a dividend paying stock with a put-option at reversion. It provides the possibility to identify the risks in property investment with regards to different types of tenants and lease terms, thereby enabling the distinction between the contribution of the lease and the vacant possession to the total value of the property with a view to more accurate pricing. This potentially enables hedging within a single property against certain lease attributes or market activities.The paper is structured in three parts. The first part contains the literature survey, which considers the different aspects of existing property valuation techniques, option pricing techniques and literature that specifically deals with option pricing within the property context. The second part deals with a theoretical explanation of the use of option pricing to value real estate, with an analysis of the required information in order to apply such techniques. The last part is an empirical testing, which is based on a portfolio of properties with varying weighted average lease expiry periods.

A MapReduce Framework for Analysing Portfolios of Catastrophic Risk with Secondary Uncertainty

The design and implementation of an extensible framework for performing exploratory analysis of complex property portfolios of catastrophe insurance treaties on the Map-Reduce model is presented in this paper. The framework implements Aggregate Risk Analysis, a Monte Carlo simulation technique, which is at the heart of the analytical pipeline of the modern quantitative insurance/reinsurance pipeline. A key feature of the framework is the support for layering advanced types of analysis, such as portfolio or program level aggregate risk analysis with secondary uncertainty (i.e. computing Probable Maximum Loss (PML) based on a distribution rather than mean values). Such in-depth analysis is not supported by production-based risk management systems since they are constrained by hard response time requirements placed on them. On the other hand, this paper reports preliminary experimental results to demonstrate that in-depth aggregate risk analysis can be realized using a framework based on the MapReduce model.

What impact does intellectual property have on the business performance of technology firms?

This paper reports the results of an original empirical study of the relationship between intellectual property and the financial performance of technology firms in the bioscience-technology industries. The study found a statistically significant positive relationship between the firms’ investments in intellectual property and their performance. The performance measure was based upon revenue-growth data collected from each firm, and the categories of intellectual property analysed included patents, trade secrets, trademarks, copyright and licenses to externally sourced technology. This study also found that the financial benefits of accumulating a strong intellectual property portfolio were enjoyed by technology firms regardless of whether they were strategically oriented towards R&D or strategically oriented towards the commercial production of products and services.

The emergence of commercial genomics: analysis of the rise of a biotechnology subsector during the Human Genome Project, 1990 to 2004.

BackgroundDevelopment of the commercial genomics sector within the biotechnology industry relied heavily on the scientific commons, public funding, and technology transfer between academic and industrial research. This study tracks financial and intellectual property data on genomics firms from 1990 through 2004, thus following these firms as they emerged in the era of the Human Genome Project and through the 2000 to 2001 market bubble.MethodsA database was created based on an early survey of genomics firms, which was expanded using three web-based biotechnology services, scientific journals, and biotechnology trade and technical publications. Financial data for publicly traded firms was collected through the use of four databases specializing in firm financials. Patent searches were conducted using firm names in the US Patent and Trademark Office website search engine and the DNA Patent Database.ResultsA biotechnology subsector of genomics firms emerged in parallel to the publicly funded Human Genome Project. Trends among top firms show that hiring, capital improvement, and research and development expenditures continued to grow after a 2000 to 2001 bubble. The majority of firms are small businesses with great diversity in type of research and development, products, and services provided. Over half the public firms holding patents have the majority of their intellectual property portfolio in DNA-based patents.ConclusionsThese data allow estimates of investment, research and development expenditures, and jobs that paralleled the rise of genomics as a sector within biotechnology between 1990 and 2004.

Structuring global Property Portfolios: A Cointegration Approach

We create globally diversified real estate portfolios using cointegration methods over 1992-2009. Cointegration is robust to intertemporal correlation instability, identifies markets that share common factors and long-term trends, and identifies leading markets that do not respond to deviations from equilibrium within each cointegrated region. Our cointegrationinspired model portfolios outperform the mean-variance optimized portfolio by 575-725 basis points annually. Differences in performance remain significant over separate time periods, and after controlling for various risk factors. Collectively, the results help clarify property portfolio selection and allocation policy vital for institutional investors and global real estate portfolio managers.

Phase change materials: Chalcogenides with remarkable properties due to an unconventional bonding mechanism

AbstractPhase change materials are characterized by a unique property combination which encompasses a pronounced property contrast between the amorphous and crystalline state, as well as rapid crystallization. This property portfolio is ideally suited for data storage applications. In this paper, the understanding of the relationship between the properties of phase change materials and their mechanism of chemical bonding will be reviewed in an attempt to provide a generic explanation for many of the unconventional properties of phase change materials.

Modelling building stock energy use and carbon emission scenarios

PurposeA systematic approach is needed to engage a broad range of stakeholders to reduce greenhouse gas (GHG) emissions from energy use in the building sector. The purpose of this paper is to develop a systems‐based bottom‐up approach for this purpose, and to demonstrate its application in a case study of office building stock in the State of New South Wales (NSW) in Australia.Design/methodology/approachA conceptual framework for the general method is developed based on a cross‐typology matrix of energy consumption and supply on the one hand, and intervention schemes or policy instruments on the other. This is then tested and demonstrated using a case study of commercial office building stock, with building energy demand calculated using a validated computer energy simulation tool for a representative set of office buildings within a local government area (LGA). The energy consumption and associated GHG emissions are then aggregated up from LGA to the whole State. The impact projections of different intervention schemes are compared and mapped spatially across the State.FindingsResults have demonstrated the significance and capability of the proposed approach, in allowing quantitative comparisons of the relative effectiveness of a specific set of regulatory, technical and behavioral scenario settings on the spatial distribution and trends in energy consumption and GHG emissions of the NSW office building stock to 2020.Research limitations/implicationsFurther case studies involving mixed building types and specific building types with greater granularity of modelling details, energy use and supply options, and spatial resolution are needed.Originality/valueThe structured cross‐typology approach is a novel contribution to bottom‐up modelling approaches to designing and/or assessing the effectiveness of specific policy instruments, alone or in combination. It will enable policy makers, property portfolio owners, utility companies and building tenants to assess the broader impacts of their specific actions towards a common goal.

Economic perspective on outsourcing of property management services

PurposeThe purpose of this paper is to identify the economic forces influencing the outsourcing process of property management services, and investigate how these forces should be applied in order to maximize the productive efficiency and performance quality, thus ensuring optimal use of resources.Design/methodology/approachMarket competition and transaction monitoring were identified to be the fundamental factors. Single‐case study method was used to quantitatively examine the impact of these economic forces on the outsourcing of property management services of the Hong Kong Housing Authority.FindingsThe property services market was contestable, and through competitive tendering the level of competition had a significant negative impact on production cost and a significant positive relationship with service quality. Fee level was also found to have no significant effect on service quality. Professional maintenance services were found to be complex and associated with significant transaction costs, especially where there was a high degree of contact with tenants.Research limitations/implicationsThe outsourcing strategy forms a conceptual baseline on which further research can build to test its significance in many other settings, thus resulting in a more robust economic theory for outsourcing of property management services.Practical implicationsCompetitive tendering should be adopted for outsourcing to minimize production cost and maximize service quality. The overall transaction costs should be minimized by focusing the limited resources on monitoring of the complex professional maintenance services, especially the services for major planned maintenance works where there are many occupiers involved.Originality/valueThe confirmatory tests indicate that the strategic objectives of cost and quality improvement from outsourcing, as expected by the stakeholders, can be achieved. Hence the research contributes to the property management practice by developing an economic strategy which optimizes the use of resources for the benefit of corporate organizations which own a property portfolio, whilst at the same time satisfying the power and needs of the tenants and other stakeholders.

Excess return sources of active property management: a case study

PurposeThe purpose of this paper is to examine the sources of direct real estate portfolio returns and their relative performance against Investment Property Databank (IPD) benchmark returns. Active property management consists of the concepts of property transaction execution and operational management, which can be classified as the main drivers of excess return sources.Design/methodology/approachUsing a sample of three different portfolios managed by two institutional investors, the paper is able to estimate the relevant factors of active property management on annual excess returns for commercial and residential property sectors via a panel regression technique.FindingsEmpirical evidence shows that property‐specific effects exhibit significant sources of excess returns, but property management cannot be identified as their main driver. Furthermore, the sources of excess returns do not differ significantly across sectors; when controlled for property age and size, it is found that their influence is rather limited.Practical implicationsInformation about the drivers of excess returns and their variations among property types may lead to superior investment decisions during portfolio rebalancing, and thus promote more efficient capital allocation. Information about return factors, i.e. about property and operational management, can substantially improve property selection and market timing in the asset allocation process. Hence, investors basing their property investment strategies on the impact of selected return factors could enhance the risk‐adjusted performance of their property portfolios.Originality/valueThis paper aims to contribute to the existing literature by identifying and quantifying the excess return sources of a given property portfolio over a predefined benchmark. Due to the lack of property‐related data, there is only limited research on the sources of direct property returns, such as property characteristics or active property management. The authors explore three main questions in this paper. First, they examine sources of excess returns over a benchmark index for several property sectors. Second, they analyze whether the drivers of excess returns vary significantly across these sectors. Third, they determine to what extent excess property returns are influenced by the “economic age” and “rentable area” of a building.

The sensitivity of UK commercial property values to interest rate changes

Duration and convexity measures are commonly applied in the management of bond portfolios to measure the sensitivity of asset values to changes in interest rates, enabling fund managers to manage their exposure to interest rate risk. Yet, there are no commonly accepted methods for applying the concepts of duration and convexity to equities and real estate, making it difficult for fund managers to analyse the exposure of multi-asset portfolios to interest rate risk (Blitzer & Dash, 2004). This paper contributes to this underdeveloped area of interest rate risk management by assessing the accuracy of using duration and convexity to measure the sensitivity of commercial property values in the UK to discount rate movements. Simulations confirm that property has duration and convexity characteristics similar to bonds. Our estimates overlap with duration figures estimated by Cairns and Wilkie (2010) for index-linked British government bonds over 15 years but are higher than their estimates for conventional bonds and five- to 15-year index-linked gilts. Perhaps more importantly, the paper demonstrates that duration is not sufficiently reliable enough to mitigate the interest rate risk attached to a property portfolio. The inclusion of convexity is necessary for effective interest rate immunisation strategies.

Portfolio greenness and the financial performance of REITs

This paper investigates the effects of the energy efficiency and sustainability of commercial properties on the operating and stock performance of a sample of US REITs, providing insight into the net benefits of green buildings. We match data on LEED- and Energy Star-certified buildings with detailed information on REIT portfolios and calculate the share of green properties for each REIT over the 2000–2011 period. We estimate a two-stage regression model and document that the greenness of REITs is positively related to three measures of operating performance – return on assets, return on equity and the ratio of funds from operations to total revenue. We also document that there is no significant relationship between the greenness of property portfolios and abnormal stock returns, suggesting that stock prices already reflect the higher cash flows deriving from investments in more efficient properties. However, REITs with a higher fraction of green properties display significantly lower market betas.

Italian Real Estate Investment Funds: Market Structure and Risk Measurement

This paper describes the Italian real estate investment funds industry, providing an overview of the distinctive features and risk factors of this sector. By using accounting and supervisory data, we: (1) compute the returns of the real estate assets in the portfolio of these funds; (2) construct a price index and a total return index of the real estate assets held by the Italian funds; (3) define a risk assessment process based on three different aspects - their financial profile, income structure and property price behaviour. This analysis allows us to select funds with a weak financial structure, poor returns, and a high probability that in a three-year interval their property portfolio will fall below their net liabilities (defined as the difference between debt and liquid assets). The proposed risk assessment can be seen as the first step towards a more intensive supervisory analysis and can also be useful for investment purposes.

IP포트폴리오의 특성분석을 위한 특허지표 개발에 대한 연구

Patents are the sources reflecting technology development by research and development(R&D) as well as the tools to secure economic benefits in the market, so using patent information is crucial for decision making processes in formulating technology development strategies. Intellectual property(IP) portfolios including a set of patents related to products and individual technologies are the basic unit that has the economic meaning in making national policies and technology strategies. Therefore, this research develops a total of 69 measures to identify the collective characteristics for IP portfolios(characteristics index), by incorporating the patent indexes that have been widely used and the patent indexes that developed recently, and applying the concepts to patent analysis that have been used in interdisciplinary studies including economics and library and information science. The results of this research produced a characteristics index manual which helps experts to identify characteristics of technological innovation systems from various dimensions. We expect that the characteristics indexes can be used as a supportive tool for comparative analysis among IP portfolios in the technology policy making process.

The liquidity crisis of German open-end real estate funds and their impact on optimal asset allocation in retirement

In course of the recent turmoil in the financial markets, several open-end real estate funds froze redemption of their units, resulting in unanticipated and unprecedented liquidity and performance shocks for investors. Against this background, we analyze the long- and short-term risk and return profiles of open-end real estate funds and their role in efficient multi-asset retirement portfolios. To this end, we introduce the Retirement Efficient Frontier, describing those investment strategies that minimize the lifetime probability of ruin for specific levels of periodic withdrawals from a given retirement wealth. We find that for low to moderate periodic withdrawals, efficient portfolios consist of up to 85% real estate fund investments in case fund units are continuously redeemable. Moreover we show that even if there is a monthly probability of 2.5% that redemption of fund units is temporarily suspended, the allocation into real estate funds in risk-efficient portfolios is only slightly affected. Yet, if funds additionally face a high risk of having to depreciate their property portfolio during a liquidity crisis, their share in efficient retirement portfolios is reduced significantly.

Investment Property Diversification Over Different Economic Phases in New Zealand

This study empirically investigates the enhancement of cross-sector diversification for investment properties in a small economy, where there are only a few regional choices. It also examines the distinct effects of optional diversification strategies over different economic phases. The study constructs investment property return indices using a unique listed investment property database in New Zealand, which compares the Sharpe ratio of optional investment portfolios under different diversification strategies.It is found that a portfolio of industrial properties in Auckland is preferable to any other property portfolios over the entire sample period in New Zealand. The findings support a prior strategy to prudently select properties in a major city in this small economy. The findings recommend direct or indirect property investors prioritize the locational choice in a small economy. The findings imply that the best diversification strategy may not be consistent over different economic phases. This study is one of the few to explicitly compare diversification strategies over different economic phases. It also provides additional new insights towards the importance of cross-sector diversification in a small economy.

Analysing the Risk and Return Profile of Chinese Residential Property Markets

This research examines the performance and diversification benefits of five leading Chinese residential property markets. On six years of reliable quarterly data, the low income returns were relatively stable compared to the considerable variations overtime and across markets in capital growth. The marked variations between the performance profiles suggested that speculative Chinese residential property markets appeared to operate independently and are influenced by local factors.Based on an efficient frontier model, residential property risk profiles can be lowered considerably with a well diversified residential property portfolio. On the available data, the optimum allocation is a residential portfolio anchored by a Beijing residential property with exposure to all markets. This achieved a 40% improvement in risk adjusted returns to that of a single location residential property portfolio. Similarly, for Chinese high net worth investors, the benefits of diversification, by combining an investor’s primary location with an additional residential property in an alternative location, lead to at least a 16% improvement in the risk adjusted returns. For an astute Chinese investor, this diversified portfolio approach provides superior stable long term returns than short term risky speculative residential property investments.

Real estate stock selection and attribute preferences

The majority of studies that explore property portfolio construction and management strategies utilise highly aggregated ex-post data, but stock selection is known to be a significant determinant of portfolio performance. Thus, here we look at stock selection, focusing on the choices faced by investors, necessitating the collection and analysis of primary data, carried out utilising conjoint analysis. This represents a new step in property research, with the data collection undertaken using a simulation exercise. This enables fund managers to make hypothetical purchase decisions, viewing properties comprising a realistic bundle of attributes and making complex contemporaneous trade-offs between attributes, subject to their stated market and economic forecasts and sector specialism. In total 51 fund managers were surveyed, producing 918 purchase decisions for analysis, with additional data collected regarding fund and personal characteristics. The results reveal that ‘fixed’ property characteristics (location and obsolescence) are dominant in the decision-making process, over and above ‘manageable’ tenant and lease characteristics which can be explicitly included within models of probabilities of income variation. This reveals investors are making ex-ante risk judgements and are considering post acquisition risk management strategies. The study also reveals that behavioural factors affect acquisition decisions.