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Real Estate

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Asset Management and Institutional Investors

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Abstract

Financial real estate is an asset class with unique distinctive features in the field of asset management. In this chapter, we will analyse the real estate market in its entirety and, subsequently, the investment vehicles in equity real estate, such as real estate funds, real estate investment trusts (REITs), real estate exchange traded funds (ETFs) and property derivatives, that allow investors to go beyond the simple direct investment, known as private property real estate. Beyond this institutional view, the chapter analyses the asset management strategies that can be implemented in this sector. The risk and return profile of real estate as an asset class is intrinsically tied to the process of value creation typical of the various strategies used by managers. Investment in real estate is highly specific and therefore the chapter examines in details the factors underlying the valuation of real estate. Once the theoretical framework and the operational techniques used to measure the value of real estate have been defined, an analysis of the risks and returns associated to the investment vehicles in this asset class is undertaken. The phenomenon of discount-to-NAV in listed real estate investment vehicles is object of an in-depth examination.

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Notes

  1. 1.

    With the establishment of the real estate investment trusts in the USA by the REIT Act of 14 September 1960.

  2. 2.

    Brueggeman and Fisher (2015); Geltner et al. (2014).

  3. 3.

    Garmaise and Moskowitz (2004).

  4. 4.

    Jowsey (2011).

  5. 5.

    Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.

  6. 6.

    For example, the German Immobilien-Sondervermögen (commonly known as Offene Immobilienfonds) must hold liquidity equivalent to at least 5 % of gross asset value. In any case, the fund can suspend redemptions in times of crisis (Maurer et al. 2012).

  7. 7.

    Sotelo and McGreal (2013).

  8. 8.

    United States Code, Title 26, § 856.

  9. 9.

    Syz (2008).

  10. 10.

    Geltner and Fisher (2007). For a survey of the numerous attempts to reach more precise and realistic pricing techniques, which have not resulted in a definitive and shared outcome, see: Fabozzi et al. (2010).

  11. 11.

    Newell and Sieracki (2010).

  12. 12.

    Until 2007 it was common practice on the most important PTRS market (i.e. the London OTC) to use the Libor variable rates to calculate the financial indexed flow of the swap. In that case, the flow would be called ‘floating amount’.

  13. 13.

    Baczewski et al. (2003).

  14. 14.

    Fuerst and Marcato (2009). Loan to value usually means the ratio between the amount of funding and the value of a good provided as collateral by the debtor. In the case of real estate portfolios, this two-way relationship between debt and collateral is not relevant. Indeed, the concept of LTV is broader and synonymous with the ratio between total debt and total assets.

  15. 15.

    Myer and Webb (2000); Fuerst and Marcato (2009).

  16. 16.

    Conner and Liang (2003).

  17. 17.

    Regulation (EU) no 575/2013, art. 4, § 1, n. 76. This definition, in turn, can be found in the International Valuation Standards: Royal Institution of Chartered Surveyors (2015).

  18. 18.

    Floyd and Allen (2011); Geltner et al. (2014). Note that in operational practice of real estate valuation, the NOI (an economic result) is often used as an approximation of cash flows over a period, i.e. in place of a financial flow.

  19. 19.

    Damodaran (2012).

  20. 20.

    Lancaster (1966); Rosen (1974).

  21. 21.

    The regression may or may not envisage an intercept, itself devoid of defined economic significance but indicating generically the value attributed by the market to all those variables that could not be included in the model. Given its purely residual economic significance, it is indicated by the Greek letter ε, rather than by the more frequently used α. When estimating the price of a building, k, the mean value of ε found in each of the N previous sales can be used.

  22. 22.

    For the sake of simplicity and in agreement with common practice, the term NAV is also used for investment vehicle that are not collective investment vehicles.

  23. 23.

    In the period 1978–2002 this relationship was statistically significant. The result can be demonstrated by a regression of the time series of quarterly returns of a US direct property index (e.g. the NCREIF Property Index) on the series of total returns of an aggregate index of US REITs (e.g. NAREIT Equity REIT Index) in the four previous quarters. Gyourko and Keim (1992); Gyourko (2004).

  24. 24.

    Geltner (1993). We underline that there is no unanimous consensus regarding the best unsmoothing procedure, in particular with regard to the estimate of the smoothing parameter. Note that if the series of unsmoothed returns were independently and identically distributed, a would be equal to the first order autocorrelation coefficient.

  25. 25.

    Damodaran (2012).

  26. 26.

    Fama and Schwert (1977).

  27. 27.

    For a review of the literature, see: Adrangi et al. (2004, 2015).

  28. 28.

    Goetzmann and Valaitis (2006); Case and Wachter (2011).

  29. 29.

    Lin and Vandell (2007).

  30. 30.

    Case et al. (2012); Yang et al. (2012).

  31. 31.

    In accordance with consolidated practice in the treatment of common funds, the NAV is always taken here as NAV per unit and not as overall NAV. As already stated, NAV is also the definition used to indicate the net assets of REITs and similar companies, for which the term “book value” would be more precise.

  32. 32.

    We use the expression ‘published NAV’ to underline the fact that the daily changes in the NAV, as a result of the natural performance of the fund and the variation in the value of the real estate assets, are disregarded. This daily performance, in fact, is not calculated, in contrast to funds investing in listed assets, and therefore the only known NAV is that published periodically.

  33. 33.

    Working from an ex post point of view, we can estimate the NAV at time T by linear interpolation of the NAV at the beginning and the end of the semester, as described in Biasin et al. (2010).

  34. 34.

    Brounen and terLaak (2005).

  35. 35.

    Capozza and Seguin (1999).

  36. 36.

    Clayton and MacKinnon (2001).

  37. 37.

    Capozza and Seguin (2003).

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Authors and Affiliations

  1. Department of Economics and Management, University of Brescia, Brescia, Italy

    Guido Abate

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  1. Guido Abate
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Correspondence to Guido Abate .

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Editors and Affiliations

  1. Department of Economics and Management, University of Brescia, Brescia, Italy

    Ignazio Basile

  2. Department of Economics and Management, University of Brescia, Brescia, Italy

    Pierpaolo Ferrari

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Abate, G. (2016). Real Estate. In: Basile, I., Ferrari, P. (eds) Asset Management and Institutional Investors. Springer, Cham. https://doi.org/10.1007/978-3-319-32796-9_14

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