Real Estate Finance Research Articles

Private Funds for Ordinary People: Fees, Flows, and Performance

AbstractWe study private funds available to retail investors of modest wealth. Our sample covers unlisted real estate investment trusts (REITs) for superior cash flow and fee data. Fee structures are skewed toward performance-insensitive components of the compensation contract, particularly front-end loads. The average unlisted REIT underperforms the listed benchmark by 6.5% per year, 5% of which is attributable to fees. Unlisted REITs underperform institutional-grade private equity real estate funds. Fees paid to investment advisors also explain fundraising success, while past performance does not. The underperformance is consistent with the consequences of managerial conflicts of interest, inadequate governance mechanisms, opaque disclosure, and poor investment advice.

The increasing importance of environmental sustainability in global real estate investment markets

PurposeWithin the context of ESG (Environment, Social and Governance), environmental sustainability has taken on increased global importance in recent years. Similarly, real estate investment managers in developing their global real estate investment portfolios need a fuller understanding of the ESG and environmental sustainability dimensions of these global real estate markets for more informed real estate investment decisions. Using the JLL GRETI sustainability sub-index, this paper examines the environmental sustainability transparency status of 99 global real estate markets over 2016–2020 and explores various strategic issues regarding ESG and environmental sustainability; particularly the critical issues relating to climate risk mitigation, climate resilience and zero-carbon. The current status of environmental sustainability in these 99 real estate markets is assessed, with areas for “best practice” improvement identified to the benefit of real estate investment managers; particularly the improvements needed in ESG to support real estate investment in the emerging real estate markets.Design/methodology/approachThe JLL GRETI sustainability sub-index is analysed to examine strategic issues relating to environmental sustainability transparency. 99 real estate markets are assessed globally for a range of critical ESG issues over 2016–2020. Differences between the developed and emerging real estate markets are highlighted.FindingsConsiderable variation was seen in the ESG and environmental sustainability practices, procedures and frameworks across these 99 real estate markets. This was particularly evident amongst the emerging real estate markets. Compared to the other five dimensions for real estate market transparency, environmental sustainability was seen to be well behind these other dimensions in most markets. Progress has been made in recent years, but it has been slow and steady rather than at a dynamic level. Clearly, more is needed globally to enhance the stature of environmental sustainability in the context of an increasing focus on ESG and specifically on climate risk mitigation, climate resilience and zero-carbon in real estate investment.Practical implicationsWith ESG and environmental sustainability taking on increased importance across the international real estate markets, it is important that real estate fund managers have a full understanding of the ESG and environmental sustainability status of these real estate markets where they may be considering real estate investment opportunities; this includes both the developed and emerging real estate markets. This is essential to ensure future capital raising for new funds, as well as supporting the global ESG agenda by the real estate investment community. Specific strategies are also identified for emerging real estate markets to improve their environmental sustainability practices and ESG status.Originality/valueThis is the first paper to use the JLL GRETI sustainability sub-index to assess the environmental sustainability status of 99 real estate markets globally; providing strategic insights for real estate investment managers as they develop their global real estate portfolios and more fully embrace the challenges of ESG and environmental sustainability in the real estate space going forward. Specific strategies are clearly identified for all markets to improve their environmental sustainability ratings to the benefit of both global real estate investment and the broader communities.

SIMULTANEOUS EQUATIONS MODELS WITH HIGHER-ORDER SPATIAL OR SOCIAL NETWORK INTERACTIONS

This paper develops an estimation methodology for network data generated from a system of simultaneous equations, which allows for network interdependencies via spatial lags in the endogenous and exogenous variables, as well as in the disturbances. By allowing for higher-order spatial lags, our specification provides important flexibility in modeling network interactions. The estimation methodology builds, among others, on the two-step generalized method of moments estimation approach introduced in Kelejian and Prucha (1998, Journal of Real Estate Finance and Economics 17, 99–121; 1999, International Economic Review 40, 509–533; 2004, Journal of Econometrics 118, 27–50). The paper considers limited and full information estimators, and one- and two-step estimators, and establishes their asymptotic properties. In contrast to some of the earlier two-step estimation literature, our asymptotic results facilitate joint tests for the absence of all forms of network spillovers.

Evaluating the Cost of Managing Real Estate Mutual Funds

We investigated the relationship between real estate mutual fund expense ratios, advisory fee, and total assets managed by real estate mutual funds. We also evaluated if cost efficiencies in management (dollar operating cost as well as advisory fee) were associated with scale in real estate investment trusts (REITs), our results showed that dollar cost increases in real estate mutual funds were less than proportionate to increases in assets, suggesting economies of scale for real estate mutual funds. Average cost elasticity for funds varied depending upon fund size, index versus non-index fund, institutional versus retail funds, global versus US real estate funds, and share class of funds. Cash flows were negatively related to the cost of managing a fund. We also found cost efficiencies in the advisory fee charged by real estate mutual funds contributed to economies of scale in the overall cost of fund management.

Housing Real Estate Economics and Finance

Housing research is one of the hot topics in many countries. This paper provides a quick review of the housing economics research in the US, Sweden, Latvia, China, Corsica, and Italy published in this special issue. Bao and Shah studied the effects of home-sharing platforms in general and the effects of the US’ Airbnb on neighbourhood rent. Wilhelmsson’s results showed that interest rates directly affected house prices and indirectly affected bank loans in Sweden. Caudill and Mixon threw light on the relative negotiating power of the buyer and seller as a key element of real estate price models. Čirjevskis presented a real application of “step-by-step” valuation options for real estate development projects as a managerial risk management tool for similar real estate development projects in the EU to make investment decisions during COVID-19 and in the post-COVID-19 era. Pelizza and Schenk-Hoppé used an exponential Ornstein–Uhlenbeck process to model price dynamics provincially and regionally to estimate the liquidation value.

Fund Closure Risks of Open-End Real Estate Funds

Over the past decades, numerous open-end real estate funds (OEREFs) in several countries became unable to maintain the liquidity provision and had to suspend the redemption of fund shares. This paper examines OEREF closures in Germany, the world’s largest OEREF market. We find that funds with a larger share of institutional investors had a higher closure probability. This is consistent with the assertion that well-informed investors are able to move more quickly and decisively and therefore trigger additional selling pressure in times of financial turmoil. In contrast, economies of scope appear to prevent closures. In detail, older funds and those sold through physical bank branch networks are less likely to close. Among the factors beyond the control of fund managers are negative spillover-effects resulting from closures of other OEREFs.

2018 Real Estate Finance & Investment Symposium

In October 2018, the Real Estate Finance & Investment Symposium, sponsored and organized by the University of Cambridge, the University of Florida, and the National University of Singapore, was held in Gainesville, Florida. Ten papers on various research topics were presented over the day and one-half symposium. Each presentationwas followed by remarks from a discussant as well as general discussion from the audience. This short editorial discusses the five papers from the symposium that are included in this special issue.

Macroprudential Policy and the Role of Institutional Investors in Housing Markets

Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment firms leverage large-scale buy-to-rent investments in real estate assets that enable them to set prices in rental housing markets. A significant fraction of this funding is being provided in the form of non-bank lending (i.e., lending that is not subject to regulatory LTV limits). I develop a quantitative two-sector DSGE model that incorporates the main features of the real estate fund industry in the current context to study the effectiveness of dynamic LTV ratios as a macroprudential tool. Despite the comparatively low fraction of total property and debt held by REIFs, optimized LTV rules limiting the borrowing capacity of such funds are more effective in smoothing property prices, credit and business cycles than those affecting (indebted) households – borrowing limit. This finding is remarkably robust across alternative calibrations (of key parameters) and specifications of the model. The underlying reason behind such an important and unexpectedly robust finding relates to the strong interconnectedness of REIFs with various sectors of the economy. JEL Classification: E44, G23, G28

Macroeconomic and Financial Variables’ Influence on Brazilian Stock and Real Estate Markets: A Comparative Analysis in the Period from 2015 to 2019

Numerous studies have sought to investigate the relationship between macroeconomic variables and financial market evolution. Such analyses, however, have focused on the stock market. The present research, as a distinction, included the index of real estate funds (IFIX) in its approach. In this context, the study comparatively analyzed the impact of macroeconomic indicators (interest rates, inflation, industrial production, and the exchange rate) and financial indicators (the S&P 500 and the oil price) on the Ibovespa and the IFIX from January 2015 to December 2019. This period was chosen due to the peculiar characteristics of the resumption of economic growth after the 2014-2016 recession in the context of changes in the degree of intervention in the economy. The research addressed the historical evolution of stock and real estate fund indices, such as the Ibovespa and the IFIX, respectively, which showed a positive trajectory, especially from 2016 onward. To achieve its objective, the research applied the vector with error correction (VEC) econometric model to determine whether there is a possibility of diversification between the two markets. Among the results obtained were relatively convergent behavior of the Ibovespa and the IFIX in the face of macroeconomic and financial shocks, according to the impulse response functions of the estimated econometric model, which prevents diversification between the two markets.

Macroprudential Policy and the Role of Institutional Investors in Housing Markets

Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment firms leverage large-scale buy-to-rent investments in real estate assets that enable them to set prices in rental housing markets. A significant fraction of this funding is being provided in the form of non-bank lending (i.e., lending that is not subject to regulatory LTV limits). I develop a quantitative two-sector DSGE model that incorporates the main features of the real estate fund industry in the current context to study the effectiveness of dynamic LTV ratios as a macroprudential tool. Despite the comparatively low fraction of total property and debt held by REIFs, optimized LTV rules limiting the borrowing capacity of such funds are more effective in smoothing property prices, credit and business cycles than those affecting (indebted) households – borrowing limit. This finding is remarkably robust across alternative calibrations (of key parameters) and specifications of the model. The underlying reason behind such an important and unexpectedly robust finding relates to the strong interconnectedness of REIFs with various sectors of the economy.

Experimental Research on the Impact of Interest Rate on Real Estate Market Transactions

Based on the close relationship between real estate and capital financing, this paper specifically discusses the impact of interest rate changes in China on real estate market transactions. Housing price regulation has been a hot and focused topic of economics research. It is important to explore the effect of interest rate on real estate market transactions, for the interest rate is an important tool for the government to carry out macrocontrol of the real estate market and affects residents’ consumption choices of goods. Currently, most scholars believe that interest rate changes have a significant impact on house prices, but their studies are often based on empirical analysis of macro data, making it difficult to exclude the effects of economic differences, geographic characteristics, and other factors. Also, some scholars believe that it is difficult for interest rates to have a long‐term impact on real estate prices. This paper applies the experimental economics method to simulate real estate transactions in the real market and control the irrelevant variables to study the movements of housing prices, transaction volumes, consumer transaction intentions and bubble indices under different deposit and lending rates. The results show that: (1) The level of deposit interest rate has a significant inhibitory effect on housing price and a significant promoting effect on real estate market transaction volume and traders’ house‐buying behavior. The higher the level of deposit interest rate is, the better the degree of regulating house prices deviating from the theoretical price is and the better the effect of inhibiting market bubbles. (2) The level of lending rate has a significant inhibiting effect on the volume of real estate transactions and a significant promoting effect on the house‐buying behavior of traders, but its effect on housing prices and market bubbles is not significant. The higher the level of lending rate is, the better the degree of regulating housing prices deviating from the theoretical price is. (3) The effect of deposit interest rate and lending rate policies on the house selling behavior of market traders is not significant.

Dilemma under the Pandemic: Real Estate Economy and Land Finance in China

China's real estate sector has taken a major hit since the outbreak of COVID-19, with the once-mighty sector reeling from capital outflows from the banking sector, the collapse of property companies, and the impact of the sector on gross domestic product. This paper will start from the current situation of real estate brokers in China, take Evergrande, other real estate enterprises and some local government policies as the entry point, analyzing the relationship between land finance and real estate finance represented by local governments and central policies and economic operation.

The relevance of ratings for investors of (semi-)open-end real estate funds: Evidence from Germany

The relevance of ratings for investors of (semi-)open-end real estate funds: Evidence from Germany

Costs and Benefits of Changed Real Estate Valuation Requirements for German Open-End Real Estate Funds

Costs and Benefits of Changed Real Estate Valuation Requirements for German Open-End Real Estate Funds

Transaction Prices of German Closed-End Real Estate Funds in the Secondary Market and Their Influencing Factors

Transaction Prices of German Closed-End Real Estate Funds in the Secondary Market and Their Influencing Factors

Commercial real estate finance and the lending cap rate

PurposeThe aim of this study is to report on a simple derivation that results in what the authors refer to as the lending cap rate. The lending cap rate is a unique cap rate resulting in a property valuation that perfectly aligns the maximum loan amount for the financing of commercial real estate.Design/methodology/approachThe derivation is the result of simple algebra relating the two most common underwriting ratios: debt service coverage and loan-to-value with the formula for the present value of an annuity. Numerical examples are presented to demonstrate the calculation of the lending cap rate, property valuation and maximum loan amount. The authors also present comparative statics results.FindingsThe main finding of this research is that once a lender knows the debt service coverage ratio, loan-to-value ratio and lending terms for a specific property financing request, a simple calculation reveals the lending cap rate and the property valuation that aligns the maximum loan amount implied by the two underwriting ratios.Practical implicationsOne practical implication of the research is that a simple calculation reveals the lending cap rate which facilitates timely property evaluations for lending purposes. The methods demonstrated also offer real estate finance educators a practical means of connecting the loan underwriting process with property appraisal thereby facilitating conceptual understanding.Originality/valueThe key finding is original, and the importance of the finding is that the determination of the lending cap rate is simple and has the ability to make commercial real estate lending faster and cheaper, especially in lending situations where an evaluation rather than an appraisal is appropriate.

Long lease real estate – a revised role for real estate in pension fund portfolios

PurposeLong lease real estate funds (over £15bn in Q3 2020) have emerged as an increasingly important part of UK pension fund real estate portfolios. This paper explores the reasons for their dramatic growth, their characteristics and performance.Design/methodology/approachThis study uses data for the period 2004–2020 collected directly from fund managers and from AREF/MSCI and empirical analysis to explore their characteristics and performance.FindingsPension fund de-risking and regulatory guidance have supported the dramatic growth of long lease real estate funds. Long lease real estate funds have delivered strong risk-adjusted returns relative to both balanced property funds (with shorter lease terms) and the wider property market. This relative performance has been particularly strong when wider property market performance has been weak. Long lease funds have objectives aligned with liability matching and their performance suggests they are lower risk (more bond-like) investments. In addition, our analysis highlights they are far less responsive to the wider property market than balanced funds. However, they are not significantly different from balanced property funds in terms of their short-term relationship with gilt yield movements.Practical implicationsFor pension funds and other investors the paper highlights that long lease real estate funds offer a different exposure than balanced property funds. Long lease funds have objectives more closely aligned to the overall objectives for pension fund investment but are not significantly more reliable than balanced property funds in the short-term as a liability hedge. For real estate fund managers, occupiers, developers and others active in the real estate market, the paper highlights why these funds have been (and are likely to remain) attractive to investors leading to substantial demand for long lease real estate investments.Originality/valueThis is the first study to review this increasingly important part of the UK real estate fund universe.

Tokenisation of corporate real estate on the blockchain : New strategies for corporate ownership and financial management

Real estate tokenisation is the process of creating a digital asset that represents ownership rights in a physical or digital asset, such as a physical property or real estate fund, on a blockchain-based system. Features of a ‘token-based economy’ on the blockchain can quicken the transformation of corporate real estate (CRE) ownership by flipping the equity and liquidity paradigm that traditionally plagues investment. For example, by providing new financial infrastructure for private secondary markets, the token economy taps global capital markets to provide an important liquidity option that was not previously available for privately held CRE assets. Separately, security tokens used together with programmable algorithms, also known as ‘smart contracts’, bring about unprecedented levels of connectivity and programmability that enhance CRE financial management, thereby removing much of the costly inefficiencies found in traditional systems. Industry experts agree that the digitisation of CRE on the blockchain — comprising tokenised real estate assets and smart contracts working off digital ledger technology — will bring about unprecedented levels of benefit to the CRE industry and the wider general economy. The impact of CRE tokenisation must not be studied in isolation, however, but within a greater perspective of ongoing industry themes. The Fourth Industrial Revolution (Industry 4.0) is driving disruptive change across all industries by fundamentally changing the way business models operate. By extension, this influences corporate motivations for how much CRE ownership is needed in the future. Separately, the continued shift towards privatisation instead of public listings over the last two decades have implications for how companies access capital markets, and consequently, how working capital in CRE asset portfolios can be recycled. This paper explores the disruptive benefits that the tokenisation of real estate on the blockchain brings to the CRE industry, in linkage with these overarching industry themes, with the aim of adding cross-disciplinary insight to the literature.

Risk and Vulnerability in the Analysis of Apartment Buildings

Abstract The real estate funds in Romania in the category of condominiums presents an important subject to be analyzed after several considerastions. Securing apartment buildings raises issues of high complexity. The present study focuses on the presentation of the criteria of analisys, the earthquake as a degradation factor of these buildings, the evolution of norms regarding seismic actions concluding with an important study case building – the Simu apartments block in Bucharest. The authors also synthesized information from several publications over time in Romania.

Investment mortgage as an innovative banking product in the real estate financing market

Subject. This article discusses the role of investment mortgage in overcoming the crisis of attracting deposits by credit institutions and stimulating the investment activity of households in the real estate financing market. Objectives. The article aims to define particularities of investment mortgage and prospects for its development in the real estate funding market, and ways to improve the quality of mortgage bonds in the investment mortgage segment using artificial intelligence technologies in underwriting. Methods. For the study, I used the systems approach, comparative and logical analyses. Results. The article presents an author-developed definition of the Investment Mortgage category, its basic elements, and it describes the investment mortgage life cycle and risks. It also proposes to supplement the scoring through using the gradient boosting technique when underwriting a credit application for investment mortgage. Conclusions and Relevance. The investment mortgage segment, including mortgage deposit and mortgage loan, has a life cycle and risks that differ from the ones of the mortgage programs implemented in the banking services market. Using the gradient boosting technique can help improve the efficiency of underwriting applications for mortgage lending and investment mortgage. The results of the study can be used by credit organizations when developing a product line of mortgage lending programs in the investment mortgage segment, and digitizing credit underwriting of mortgage borrowers.