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This paper compares the risk and return characteristics of real estate investment approaches which employ varying formats of domestic real estate (direct exposure, balanced and specialist unlisted funds, a multi-manager approach and listed securities) to deliver returns relative to a UK market index. Because there is an absence of relevant published literature in this specific field, the particular aim of the research is to examine the case for the multi-manager solution to institutional real estate investment. Based on a random stochastic simulation of historic performance data from 2003 to 2012, we draw several conclusions which accord reasonably well with finance theory.
Firstly, we find that it is extremely difficult and/or costly to access or replicate direct property market returns as measured by the IPD All Property Index. The results of our analysis indicate that an investor in UK real estate expecting to receive UK direct market performance (as defined by the IPD UK All Property Index) would, on average, have been disappointed regardless of the investment approach selected. This suggests that an investor/manager setting out to deliver returns in line with the IPD index would have to demonstrate significant levels of skill.
It is estimated that over the 10 year analysis period both direct and listed investment strategies outperformed multi-manager strategies (by 121 bps and 59bps per annum respectively). However, this outperformance would have been delivered at the cost of significant tracking error against direct property benchmarks.
As expected, it is clear that multi-manager strategies were able to deliver returns that more effectively replicated a direct benchmark. However, multi-manager fees negatively impacted on returns and largely accounted for average under-performance of 0.15% against the direct benchmark. It is also clear that the number of investments or funds held in a multi-manager mandate should not impact the average return but significantly reduces the average tracking error against direct benchmarks. The range of returns and tracking errors narrows considerably as the number of underlying funds increases, reducing both risk and the opportunity to out-perform an index.
– The purpose of this paper is to identify the main determinants of foreign direct real estate investments (foreign direct investment (FDI)) in selected Middle Eastern and North African (MENA) countries.
– The empirical work of this study is an econometric analysis of FDI in the commercial real estate sector for eight MENA markets, namely Algeria, Egypt, Morocco, Qatar, Saudi Arabia, Turkey, Tunisia and the UAE during the period 2003-2009. The econometric analysis is carried out using the pooled Tobit model technique for panel data.
– The paper finds that both country-specific factors and real estate sector-specific variables consistently support hypotheses explaining commercial real estate-related FDI, and find evidence that political stability explains why some selected MENA countries attract more real estate investments than other MENA countries.
– The findings should be seriously considered in any policy making effort on the part of governments in the region.
– The authors contribute to the existing literature in many ways. First, the study aims to develop econometric models, using both conventional and unique variables, to be generalised and applied to any developed or emerging market. The study applies relevant techniques in estimating the models, including the pooled Tobit model. Second, the research studies eight selected MENA real estate markets from 2003 to 2009, a timeframe and geography not examined in previous published empirical work on commercial real estate investments. Lastly, and for the first time in real estate literature, the study applies the location dimension of Dunning’s OLI paradigm as a theoretical explanation for the behaviour of foreign investors in commercial real estate towards the selected MENA markets.
This study investigates performance persistence across real estate private equity funds. We apply a combination of non-parametric and parametric tests to assess the relationship between past fund performance and subsequent fund performance of non-listed real estate funds. Based on a large global sample of value-added and opportunistic real estate private equity funds raised between 1990 and 2009, we use contingency tables, cross-product ratios, rank correlation statistics and regression analyses to investigate whether there is persistence in the performance across consecutive funds. We find strong evidence for performance persistence across directly consecutive funds. However, we find little support for a relationship between the performance of other prior funds and the focal fund, suggesting that performance persistence is a short-term phenomenon.
The article presents a study which examines the institutional and real estate specific drivers of cross-border real estate capital. It looks at the significant barriers of cross-border capital flows, such as real estate market liquidity and transparency, as well as considers direct property returns to account for tactical pricing in different countries. Information about determinants of cross-border real estate flows and role of the economy's stance as drivers of domestic investment are noted.
We study a unique data set in order to examine the performance of a sample of 169 global private equity real estate investment funds across the core, value-add and opportunistic investment style categories over the most recent property cycle (2001-2011). We employ a multi-factor asset pricing model to measure the impact on the funds’ total excess returns of the underlying real estate market, managerial skill measured by Jensen’s alpha, leverage and, for the first time, managerial skill as it relates to timing leverage decisions to anticipated future market trends. We find evidence consistent with the hypotheses that i) fund performance is almost directly proportional to the return on the underlying real estate market, ii) there is evidence for systematic underperformance as measured by Jensen’s alpha, possibly related to market frictions, iii) leverage cannot be viewed as a long-term strategy to enhance performance, and iv) timing leverage choices to the expected future market environment does not appear to add significantly to fund excess returns.
Efficient markets should guarantee the existence of zero spreads for total return swaps. However, real estate markets have recorded values that are significantly different from zero in both directions. Possible explanations might suggest non-rational behaviour by inexperienced market players or unusual features of the underlying asset market. We find that institutional characteristics in the underlying market lead to market inefficiencies and, hence, to the creation of a rational trading window with upper and lower bounds within which transactions do not offer arbitrage opportunities. Given the existence of this rational trading window, we also argue that the observed spreads can substantially be explained by trading imbalances due to the limited liquidity of a newly formed market and/or to the effect of market sentiment, complementing explanations based on the lag between underlying market returns and index returns.
The purpose of this paper is to consider prospects for UK REITs, which were introduced on 1 January 2007. It specifically focuses on the potential influence of depreciation and expenditure on income and distributions.
The retention rate of a company has an impact on its earnings and dividend growth. Corporate management has control over this. However, lease structures in some real estate markets reduce the control of investment managers and force them to adopt full distribution policies and a passive management style. This is likely to impact the rental performance of the real estate by permitting depreciation to go uncorrected. This paper examines several European office markets across which lease structures and retention rates vary. It then compares depreciation rates across these markets. It is concluded that there is evidence of a relationship between retention and depreciation. Markets with particularly inflexible lease structures clearly exhibit low retention rates, and we can tentatively suggest higher levels of rental value depreciation. This poses interesting questions concerning the relationships between lease structures in different markets and their impact on expenditure by owners, and also concerning the impact on building depreciation and property performance. While longer and deeper datasets are necessary to establish direct linkages between lease structures and performance, this paper raises important issues for global investors.
There is a substantial literature which suggests that appraisals are smoothed and lag the true level of prices. This study combines a qualitative interview survey of the leading fund manager/owners in the UK and their appraisers with a empirical study of the number of appraisals which change each month within the IPD Monthly Index. The paper concentrates on how the appraisal process operates for commercial property performance measurement purposes. The survey interviews suggest that periodic appraisal services are consolidating in fewer firms and, within these major firms, appraisers adopt different approaches to changing appraisals on a period by period basis, with some wanting hard transaction evidence while others act on "softer" signals. The survey also indicates a seasonal effect with greater effort and information being applied to annual and quarterly appraisals than monthly. The analysis of the appraisals within the Investment Property Databank Monthly Index confirms this effect with around 5% more appraisals being moved at each quarter day than the other months. January and August have significantly less appraisal changes than other months.
Real Estate Investment: A Strategic Approach provides a unique introduction to both the theory and practice of real estate investing, and examines the international real estate investment industry as it reacts to the global financial crisis.
Andrew Baum outlines the market and the players who dominate it; the investment process; the vehicles available for investment; and a suggested approach to global portfolio construction. The book contains many useful features for students including discussion questions, a full further reading list and case studies drawing on international examples from the UK, continental Europe, the USA and Asia.
Ideal for undergraduate and postgraduate students on all real estate and property courses and related business studies and finance courses, Real Estate Investment is designed to provide a foundation for the next generation of investment managers, advisers and analysts.
Developments in the sophistication of global real estate markets mean that global real estate investment is now being executed professionally. Thanks to academic enquiry, professional analysis and entrepreneurial activity, backed by the globalisation of all investment activity, there is now an available body of material which forms the basis of this scholarly but practical summary of the new state of this art.
The measurement, benchmarking, forecasting and quantitative management techniques applied to property investments are now compatible with those used in other asset classes, and advances in property research have at last put the ongoing debate about the role of real estate onto a footing of solid evidence.
The truly global scope and authorship of this book is unique, and both authors here are singularly well qualified to summarise the impact and likely future of global innovations in property research and fund management. Between them, they have experienced three real estate crashes, and have observed at first hand the creation of the real estate debt and equity instruments that led to the global crisis of 2008-9.
This book explains the process of property investment appraisal – estimating both the most likely selling price (market value) and the worth of property investments to individual or groups of investors (investment value).
Valuations are important: they are used as a surrogate for transactions in the construction of investment performance and they influence investors and other market operators when transacting property. Valuations need to be trusted by their clients and valuers therefore need to produce rational and objective solutions.
In a style that makes the theory as well as the practice of valuation accessible to students and practitioners, the authors provide a valuable critique of conventional valuation methods and argue for the adoption of more contemporary cash-flow methods. They explain how such valuation models are constructed and give useful examples throughout.
The UK property investment market has been through periods of both boom and bust since the first edition of this text was produced in 1988 and the book includes examples generated by the different market states: for example, complex reversions, over-rented situations and leasehold examples are in ready supply and are examined fully by the authors. They have retained the book’s basic structure and thrust, setting out fundamental investment and appraisal theory in Part One of the book, but adding a new chapter on building and modelling cash flows as a precursor to the investment material in Part Three.
The heart of the book remains the critical examination of market valuation models addressed in Part Two – it remains the case that no other book addresses this issue in detail.
The dissemination of robust real estate data can help to improve market efficiency and investment analysis. To provide a perspective on property prices, a long series is vital. While long commercial and residential real estate data series are available, agricultural land is less well served. Comparable series describing long-term price and return histories for farmland in England are fragmented. We redress this data deficiency after considering the methodological complexities involved. The study employs a chain-linking approach to construct a long-term farmland price series for England. It then adjusts the series for inflation to examine real land prices. The resulting two-century series of English farmland prices establishes a basis for a more efficient farmland market analysis.
Notwithstanding issues around long-run chain component heterogeneity, the combined series illuminates English average farmland price dynamics and changing land market fortunes. For more than two centuries English land price real capital returns were positive. Farmland real price growth was 0.33 per cent annually from 1781 to 2013 and 0.71 per cent from 1801 to 2013 as measured by the geometric mean. The series provides prima facie support for land investment, even when ignoring spatial peri-urban opportunities, rental income or tax advantages.