chapter 22: real estate investment performance and portfolio considerations
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Chapter 22: Real Estate Investment Performance and Portfolio Considerations. Real Estate Investment Performance. Limited data Private, negotiated transactions Asset is non-homogeneous Thinly traded market Real estate specific data sources NAREIT NCREIF Property Index. - PowerPoint PPT PresentationTRANSCRIPT
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter 22: Real Estate Investment
Performance and Portfolio Considerations
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Real Estate Investment Real Estate Investment PerformancePerformance
Limited data– Private, negotiated transactions– Asset is non-homogeneous– Thinly traded market– Real estate specific data sources
NAREITNCREIF Property Index
22-3
Exhibit 22-2Cumulative Total Returns REITs, S&P 500, NCREIF,
Bonds, and T-Bill Indexes, 1985-2009
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Real Estate Investment Real Estate Investment PerformancePerformance
Holding Period Returns
PT = End of period price
PT-1 = Beginning of period price
D1 = Dividends
1T
11TT
P
DPPHPR
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Real Estate Investment Real Estate Investment PerformancePerformance
Example 22-1:– Purchase price $100– Sales price $110– Dividend received $5
– HPR = $15/$100 = 15%
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Real Estate Investment Real Estate Investment PerformancePerformance
Geometric Mean Return
Arithmetic Mean – a simple (non-compounded) average
1nn21 )HPR(1)HPR)(1HPR(1GMR
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Real Estate Investment Real Estate Investment PerformancePerformance
Example 22-2– Consider the following annual returns:
15%, 20%, -30%, 22%
– Arithmetic mean = (25+20-30+22)/4 = 9.25%– Geometric mean =[(1.25)(1.2)(.7)(1.22)].25-1– Geometric mean = 6.39%
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Real Estate Investment Real Estate Investment PerformancePerformance
Historical comparisons Risk
– Business risk– Default risk (from leverage)– Liquidity risk
Variability in asset returns & risk premiums
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Real Estate Investment Real Estate Investment PerformancePerformance
Coefficient of Variation– = Standard Deviation of Returns/Mean Return– Risk per unit of return– Also known as “risk-to-reward” ration
Portfolios– Asset efficiency: Does adding an asset to a portfolio
add to returns while maintaining or lowering portfolio risk?
Portfolio Returns
Where W’s are weights
... )HPR(W)HPR(WHPR jjiiP
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Exhibit 22-8Portfolio Returns of NCREIF and S&P 500 Stocks, 1978-
2009
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Exhibit 22-9Efficient Frontiers
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Real Estate Investment Real Estate Investment PerformancePerformance
Example 22-3 Portfolio
– Asset A: weight 30%, return 10%– Asset B: weight 40%, return 15%– Asset C: weight 30%, return 18%
Portfolio return– (.3x10)+(.4x15)+(.3x18)= 14.4%
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Real Estate Investment Real Estate Investment PerformancePerformance
Portfolio risk– Standard deviation
Not a weighted averageThere is interaction between returns of assets
Covariance– Absolute measure of how two data series
(such as asset returns) move together over time
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Real Estate Investment Real Estate Investment PerformancePerformance
Correlation– Relative measure of movement– Range of +1 to -1
– For example, as the correlation approaches +1, two series are said to move very closely together. The converse is also true.
ji
ijij σσ
COV
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Real Estate Investment Real Estate Investment PerformancePerformance
Portfolio weighting– Efficient frontier
Maximum return for a given risk level
Diversification & real estate– Historical evidence– NCREIF Index & appraisal smoothing– Traded REITs & public markets risk
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Exhibit 22-10NCREIF versus NAREIT (REITs) Quarterly Returns,
1985-2009
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Real Estate Investment Real Estate Investment PerformancePerformance
Diversification– Property Type & Location
Global diversification– Evolution of global REIT structures– CMBS markets– International Indices
Socially responsible property investing
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Exhibit 22-11NCREIF Returns by Property Type, Four Quarter Rolling
Total
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Exhibit 22-12NCREIF Returns by Selected MSA, Four Quarter Rolling
Total
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Real Estate Investment Real Estate Investment PerformancePerformance
Diversification & global cities Risks of global investment
– Currency risk– Incomplete information– Different tax laws & property rights– Political risk– Communication & culture differences
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Exhibit 22-14Largest Commercial Real Estate Markets
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Exhibit 22-15GDP Growth Rates for Different Global Cities
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Real Estate Investment Real Estate Investment PerformancePerformance
Derivatives– Derivatives allow investors to take a position
in real estate without actually buying or selling properties.
– Long & short positions – Overexposure & underexposure to property
types