Download 07 - Commercial Real Estate Analysis and Investment

CHAPTER 7 LECTURE.
BACKGROUND . . .
WHY DO PEOPLE
INVEST?...
Individuals:
– THE 25-YR-OLD "YUPPY" ? . . .
– THE 25-YR-OLD "DINC" COUPLE ? . . .
– THE 35-YR-OLD "YOUNG FAMILY" ? . . .
– THE 45-YR-OLD "MID-LIFE CRISIS" ? . . .
– THE 65-YR-OLD "RETIREE" ? . . .
 DIFFERENT LIFE STYLES, LIFE CYCLES,
PERSONAL GOALS, LEVELS OF WEALTH
WHY DO PEOPLE
INVEST?...
Institutions:
– LIFE INSURANCE COMPANIES
– PENSION FUNDS
– MUTUAL FUNDS
– BANKS
– FOUNDATIONS
DIFFERENT CONSTITUENCIES, EXPERTISE,
LIABILITIES, REGULATIONS, SIZES
WHY DO PEOPLE
INVEST?...
===> DIFFERENT TIME HORIZONS, RISK
TOLERANCES, NEEDS FOR INCOME vs
GROWTH
Therefore, . . . (implications for financial
services industry)
TWO MAJOR INVESTMENT
OBJECTIVES:
1)
GROWTH (SAVINGS) - RELATIVELY
LONG-TERM HORIZON (NO
IMMEDIATE NEED);
2)
INCOME (CURRENT CASH FLOW) -SHORT-TERM & ON-GOING NEED
FOR CASH.
MAJOR CONSTRAINTS &
CONCERNS:
-
-
RISK
LIQUIDITY
TIME HORIZON
MANAGEMENT BURDEN, EXPERTISE
AMOUNT OF FUNDS AVAILABLE FOR
INVESTMENT (SIZE)
CAPITAL CONSTRAINT
Therefore (again), . . . What?
Exhibit 7-1: UNDERLYING ASSETS vs INVESTMENT
PRODUCTS, an Example from traditional corporate
finance:
Underl. Asset:
Invest. Products:
Invest. Product:
Invest. Products:
ABC Widgets Corporation
(Collection of Physical, Human, & Legal Assets & Relationships)
ABC Common Stock
(Subordinated claims)
- Moderate Risk
- Moderate Total Return
- Low Cur.Yield
ABC Corporate Bonds
(Senior claims)
- Low Risk
- Low Total Return
- High Cur.Yield
Call Options
on ABC Stock
(Contingent claims)
- High Risk
- High Total Return
- Zero Cur.Yield
Various Mutual Funds
(owning various different types of claims on ABC & other assets)
- Various Risk, Return, & Cur.Yield Configurations
Exhibit 7-2: A REAL ESTATE EXAMPLE of the
Investment System
Underl. Asset:
(Priv.Traded)
"Bricks & Mortar" (e.g., Grump Family Shopping Centers)
(Rent-producing Real Properties )
Private
Invest. Products:
e.g., Ltd Partnerships
(or CREFs, Priv.REITs, etc)
Own equtiy in properties:
LP Shares (units) privately held
& privately traded if at all
Public
Invest. Products:
REITs
“UPREIT” Owns
LP Units,
Issues publicly
traded shares.
(May also directly own
Underl.Asset, or Mortgs
& CMBS)
Investors:
individual,
institutional
Small
&
Large
Investors
Large
Investors
(Wealthy Individuals, Developers, Institutions)
Commercial Mortgages
Senior (debt) claims:
Privately held & traded
("whole loans")
CMBS
publicly traded
securities based
on a pool of mortgs
Small
&
Large
Investors
Exhibit 7-3:
End of Year Public vs Private Asset Mkt Com m ercial R.E. Values:
(Indexes set to have Equal Avg Values 1974-98)
2.2
2.0
1.8
1.6
1.4
1.2
1.0
74
76
78
80
82
84
NAREIT (Unlevered)
86
88
90
92
94
96
98
NCREIF (Unsmoothed)
2000
Exhibit 7-4: Approxim ate Aggregate Value of Asset
Classes, USA late 1990s ($Trillion)
2
8
Cash
11
Stocks
Bonds
Real Estate*
12
Exhibit 7-5: Stereotypical characterization of major investment asset
classes...
STOCKS
REAL
ESTATE*
LONG TERM
BONDS**
CASH
(T-BILLS)
RISK
HIGH
MOD. to LOW***
MOD. to LOW***
LOWEST
TOTAL RETURN
HIGH
MODERATE
MODERATE
LOWEST
CURRENT
YIELD
LOW
HIGH
HIGHEST
MODERATE
GROWTH
HIGH
LOW
NONE
NONE****
L.R. GOOD
GOOD
BAD
BEST
(IF REINV)
INVESTMENT
CONCERN:
INFLATION
PROTECTION
*Unlevered institutional quality commercial property (fully operational).
**Investment grade corporate or Government bonds.
***Low risk for investors with long-term horizons and deep pockets, so they can hold the assets to
maturity or until prices are favorable. Moderate risk for investors fully exposed to asset market price
volatility.
****Unless the investment is rolled over (reinvested), in which case there is no current yield.
Exhibit 7-6: HISTORICAL PERFORMANCE OF MAJOR INVESTMENT
ASSET CLASSES, COMPARED TO INFLATION (CPI), 1969-2001
Value of $1 with Reinvestment: 1969-2001
$50
$45
Stocks $37.95
LT Bond 16.42
Real Est 15.99
TBills
7.68
CPI
4.68
$40
$35
$30
$25
$20
$15
$10
$5
$0
69
71
73
CPI
75
77
79
TBill
81
83
85
SP500
87
89
91
93
LGBond
95
97
99
RE
01
STATISTICS ON ANNUAL RETURNS (1970-2001):
Average
Average
Average
Asset Class Tot.Return Std.Dev
Inc.Return Apprec.Ret
T Bills
G Bonds
Real Estate
Stocks
6.61%
9.75%
9.65%
13.30%
2.61%
11.95%
9.67%
16.67%
6.61%
8.54%
5.57%
3.86%
0.00%
1.21%
4.08%
9.45%
Inflation
4.99%
3.20%
____________
____________
____________
____________
____________
____________
First half of the period…
Value of $1 with Reinvestment: 1969-85
$7
$6
$5
Real Est
Stocks
Bonds
TBills
CPI
6.03
4.65
3.58
3.35
2.89
77
79
$4
$3
$2
$1
$0
69
70
71
CPI
72
73
74
TBill
75
76
78
SP500
80
81
82
LGBond
83
84
85
RE
Second half of the period…
Value of $1 with Reinvestment: 1985-2001
$12
Stocks
$8.17
Bonds
4.59
Real Est 2.65
Tbills
2.29
CPI
1.62
$10
$8
$6
$4
$2
$0
85
86
CPI
87
88
89
90
TBill
91
92
93
SP500
94
95
96
97
LGBond
98
99
00
RE
01
Exh.7-9a: Avg.Ann.Total Return (1970-2001)
14%
12%
10%
8%
6%
4%
2%
0%
T Bills
G Bonds
Income
Real Estate
Growth
Stocks
Exh.7-9b: Annual Volatility (1970-2001)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
T Bills
G Bonds
Real Estate
Stocks
EXHIBIT 7-10: THE "ROLLER COASTER RIDE" IN COMMERCIAL
PROPERTY PRICES OVER THE LAST ONE-THIRD-CENTURY . . .
Price Level Index U.S. Institutional Real Estate (nominal $)
3.5
3.0
Overbuilding
Disinflation
2.5
2.0
1.5
1.0
0.5
Tax reform
REITs
REIT bust,
Recession
S&L
S&L Dereg Crisis:
FIRREA
Boom, Tax incentives
ERISA: MPT
Recession
=>P.F. demand
inflation fears
Recession
Securitzn:
- REITs
- CMBS
0.0
69 71
73 75
77 79
81 83
85 87
89 91
93 95
97 99
01