Transcript Chap022
Chapter 22: Real Estate Investment Performance and Portfolio Considerations McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 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 22-2 Exhibit 22-2 Cumulative Total Returns REITs, S&P 500, NCREIF, Bonds, and T-Bill Indexes, 1985-2009 22-3 Real Estate Investment Performance Holding Period Returns PT PT 1 D1 HPR PT 1 PT = End of period price PT-1 = Beginning of period price D1 = Dividends 22-4 Real Estate Investment Performance Example 22-1: – Purchase price $100 – Sales price $110 – Dividend received $5 – HPR = $15/$100 = 15% 22-5 Real Estate Investment Performance Geometric Mean Return GMR n (1 HPR1 )(1 HPR2 )(1 HPRn ) 1 Arithmetic Mean – a simple (non-compounded) average 22-6 Real Estate Investment Performance 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% 22-7 Real Estate Investment Performance Historical comparisons Risk – Business risk – Default risk (from leverage) – Liquidity risk Variability in asset returns & risk premiums 22-8 Real Estate Investment Performance 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 HPRP Wi (HPRi ) Wj (HPR j ) ... Where W’s are weights 22-9 Exhibit 22-8 Portfolio Returns of NCREIF and S&P 500 Stocks, 19782009 22-10 Exhibit 22-9 Efficient Frontiers 22-11 Real Estate Investment Performance 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% 22-12 Real Estate Investment Performance Portfolio risk – Standard deviation Not a weighted average There is interaction between returns of assets Covariance – Absolute measure of how two data series (such as asset returns) move together over time 22-13 Real Estate Investment Performance Correlation – Relative measure of movement – Range of +1 to -1 ij COVij σ iσ j – For example, as the correlation approaches +1, two series are said to move very closely together. The converse is also true. 22-14 Real Estate Investment Performance 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 22-15 Exhibit 22-10 NCREIF versus NAREIT (REITs) Quarterly Returns, 1985-2009 22-16 Real Estate Investment Performance Diversification – Property Type & Location Global diversification – Evolution of global REIT structures – CMBS markets – International Indices Socially responsible property investing 22-17 Exhibit 22-11 NCREIF Returns by Property Type, Four Quarter Rolling Total 22-18 Exhibit 22-12 NCREIF Returns by Selected MSA, Four Quarter Rolling Total 22-19 Real Estate Investment Performance Diversification & global cities Risks of global investment – Currency risk – Incomplete information – Different tax laws & property rights – Political risk – Communication & culture differences 22-20 Exhibit 22-14 Largest Commercial Real Estate Markets 22-21 Exhibit 22-15 GDP Growth Rates for Different Global Cities 22-22 Real Estate Investment Performance 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 22-23