Transcript Chapter 21 Institutional Investment and REITs
Chapter 21 Institutional Investment and REITs
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Major Topics
What is Institutional Investment?
The Players in the Institutional Investment Industry
What are REITs?
REIT regulation and earnings measures
Measures of Risk
Modern Portfolio Theory and the Role of Real Estate Equity
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Institutional Real Estate Investment
The total value of pension fund assets grew from around $500 Billion in 1980 to over $4.3 Trillion by 2001
Substantial growth of pension fund capital is expected to continue into the 21st century as the 75 million-strong "baby boom" generation hits its peak earning years and prepares for retirement
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Investing in Real Estate vs. Stocks and Bonds
Large lump sums are required to purchase a single real property asset
Property management and real estate asset management services are needed
Real Estate is Illiquid, and takes longer, and is more expensive (per dollar invested), to sell real property assets than to sell the financial securities
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Public and Private Asset Markets
Public asset markets refers to public exchanges such as the New York Stock Exchange, which provide easy and inexpensive access to all investors, large and small
Private asset markets refers to markets in which the individual capital assets are traded privately in "deals" negotiated between individual buyers and sellers
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Modes of Investing in Real Estate
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Industry Associations
PREA: The Pension Real Estate Association
NCREIF: The National Association of Real Estate Investment Fiduciaries
AIMR: The Association for Investment Management and Research
NAREIT: The National Association of Real Estate Investment Trusts
RERI: The Real Estate Research Institute
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
REITs
Real Estate Investment Trusts by Congress in 1960 were created
a REIT is a company dedicated to owning and, in most cases, operating income producing real estate, such as apartments, shopping centers, offices and warehouses
The main benefit of being a REIT: one level of taxation similar to a partnership
Main limitation of being a REIT: a restriction on earnings retained by the company
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
REIT Growth
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
REIT Ownership
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
How Do Institutional Investors View Risk in a Portfolio Context?
Total Risk Systematic Risk Beta
Measures of Risk-Adjusted Returns
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Measures (Contd.)
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Portfolio Theory and the Role of Real Estate Equity
MPT is the modern, quantitative version of more traditional diversification rules of thumb
MPT suggests that real estate equity ought generally to be one of the major asset classes in the portfolio, along with stocks and bonds
MPT is also applied to institutional real estate investment
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Modern Portfolio Theory
The essential idea in MPT is to find combinations of investments (i.e., "portfolios") which will minimize the amount of portfolio risk (i.e., volatility across time) for a given target total return, or (equivalently) maximize the expected portfolio return for a given target maximum portfolio risk
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
MPT (Contd.)
The required informational inputs to solve this portfolio problem are, for each asset or class of assets to be considered in the portfolio:
Expected return
Volatility (standard deviation of return across time)
Correlation’s coefficients of the returns between each pair of assets (or asset classes)
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
MPT (Contd.)
Example: using a quadratic programming optimization technique The portfolio mean is just the weighted average of the individual asset means:
The portfolio volatility is the square root of the portfolio variance
“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
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“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner