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Download 07 - Commercial Real Estate Analysis and Investment
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Transcript
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