Download Diversified Investment in Listed Real Estate

Doctoral Session
ERES Conference 2009, Stockholm
Diversified Investment in Listed Real Estate
– A Competitive Analysis of REIT-Funds, Index-Certificates and Exchange-Traded Funds based on
Transaction Cost Theory
Patrick Schlump
Stockholm, June 24, 2009
Advisors: Prof. Dr. Karl-Werner Schulte, Prof. Dr. Klaus Röder
Structure of the Presentation
1
Introduction
2
Theoretical Foundation and Fundamentals
3
Analysis and Study Setup
4
Summary
5
Discussion
June 24, 2009
Doctoral Session
2
1
Introduction
Problem Description
Listed real estate as part of a mixed-asset portfolio
Stocks
•
•
•
Bonds
Real Estate
Cash
non-Listed
Listed
REITs
Real Estate
Companies
Listed real estate constitutes a separate asset class
than non-listed real estate
Variety of products available to implement strategy
Active vs. passive problem arises for diversified
products
Dilemma of product choice
June 24, 2009
Doctoral Session
Other
Collective
Investment
Schemes
Active
Passive
• REIT-Funds
• Exchangetraded
Funds
• IndexCertificates
• (Index
Funds)
3
1
Introduction
Problem Description
Investment objectives for direct real estate are assumed to apply for listed real
estate as well
Secondary
Objectives
Primary
Objectives
Real Estate Investment Objectives
Safety
Rate of Return
Manageability of
Investment
Maintanance of Capital
Diversification
Liquidity
Accumulate
Undisclosed Reserves
Exploitation of Tax
Advantages
Owner-Occupation
Prestige Enhancement
Common Welfare
Enhancement
• Hierarchy of objects may vary across investors
• Increased cost awareness among (private) investors
• More transparency requirements because of Mifid
June 24, 2009
Doctoral Session
4
1
Introduction
Purpose of the Study
The aim of the analysis is to explore which diversified product in listed real estate
provides the best outcome from a private investor‘s view in terms of transaction costs
Risk-adjusted Performance
Overview of the selected product types
History
Legal
Structure
Trading
Risks/
Chances
Listed real estate products act
in “parallel” worlds:
Transaction Cost Theory
Established stock
market products
Life Cycle Cost Model
+
Product Type Efficiency
Diversified products
for listed real estate
Real estate market
Identification of most efficient vehicle
June 24, 2009
Doctoral Session
5
2
Theoretical Foundation
Efficient Market Hypothesis
Within real estate stock markets less information efficiency than within general
stock markets is assumed
General stock
market
• No outperformance for actively managed products in efficient
markets in the long run
• Passive strategies are “cheaper” to implement
• Passive products such as ETFs and Index-Certificates are
superior to mutual funds
Listed real estate
market
• Findings on market efficiency of listed real estate are ambiguous
• REIT markets are becoming more efficient
• Differences among countries evident
• Active management might generate excess returns in listed real
estate markets
June 24, 2009
Doctoral Session
6
2
Theoretical Foundation
Transaction Cost Theory
Applied measures of costs neglect significant factors
“The shortest route to the top quartile in performance is to be in the bottom quartile of
expenses.” (Bogle 2000)
•
•
•
•
Transaction cost theory traditionally analyses make-vs.-buy
decisions, i.e. vertical integration
Theory can be applied to various other scenarios
Disclosure of TER (Total Expense Ratio) as an indicator of
charges
Initial charges and implicit costs are not covered by TER
Explicit
Brokerage Commissions
Market Fees
Clearing and Settlement Costs
Taxes/Stamp Duties
June 24, 2009
TER components:
Management fees,
Custodian bank fees,
Audit fees, Disclosure
costs
Implicit
Bid-Ask Spread
Market Impact
Operational Opportunity Costs
Market Timing Opportunity Costs
Missed Trade Opportunity Costs
Doctoral Session
7
3
Analysis and Study Setup
Lifecycle Transaction Costs
Most transaction costs within an investment lifecycle are implicit and not visible to
an investor
Explicit/Implicit
Ex-ante
Ex-post
Initiation
Costs
Bargaining
Costs
Identification of
instrument
Determination of
investment
strategy
Identification of
trading place
Identification of
trading partner
Price negotiation
Commissions and
fees
Clearing &
Settlement
Costs
Adjustment
Costs
Monitoring
Costs
Exit Costs
Load fees
Exchange fees
Management fees
Back-end load fees
Market impact
Trading costs
Account fees
Redemption fees
Bid/Ask spread
Taxes
Market impact
Commissions
Transaction costs,
Administrative
expenses
Purchase fees
Rebalancing costs
Information/Searc
h costs
Taxes
Distribution/Marke
ting fees
Legal expenses
Source: Own illustration following Picot (1982).
June 24, 2009
Doctoral Session
8
3
Analysis and Study Setup
Product Type Efficiency
A generic comparison shows the differences of the product types
Criterion
ETFs
Index- Certificates
REIT-Funds
Diversification
High
High
Yes
Tracking error
Low
Low
Yes, on purpose
Dividend
participation
Yes
Depends on index
Yes
Trading costs
Commissions and
fees
Commissions and
fees
Sales load
Management fee
Yes
Yes/no
Yes
Price finding
Continuously
Continuously
Daily
Liquidity
Very high
Very high
Daily redemption
Counterparty risk
No, except for
swap-based
Yes
No
Trading platform
Stock exchange/
OTC/Issuer
Stock
exchange/OTC
Issuer
June 24, 2009
Doctoral Session
9
3
Analysis and Study Setup
Product Type Efficiency
Diversification as a criterion for market efficiency
Asset Class
Level
Product Type
Level
General diversification benefits of listed real estate
Regulatory provisions, affecting diversification
June 24, 2009
Property-Developer
Property-Investor
Regional/Local
National
Property-Trader
International
Product Level
Operational Diversification
Sectoral Diversification
Source: Own illustration following Nowak (2005).
Doctoral Session
10
3
Analysis and Study Setup
Product Type Efficiency
Further Efficiency Criterions need to be analyzed
Market
Efficiency
Diversification: Analysis and comparison of different levels of
diversification
Transparency: Ability to observe current and recent levels of market activity
and price formation
Flexibility and
Accessibility:
Extent to which investors can use the product
Liquidity:
Pricing Efficiency
Trading
Efficiency
Risk Management
Efficiency
June 24, 2009
Price finding:
Product costs:
Comparison of liquidity provisions offered by the respective
product types
Degree of replicating the underlying best
Comparison of costs associated with the set-up and running of
the legal construct
Round trip costs:
Exit costs:
Fees and expenses:
Analysis of costs
Benchmarking: General ability and process to mirror an underlying
Dividend policies: Methods and consequences of dividend handling
Tracking error: Analysis of deviation from a defined underlying
Doctoral Session
11
4
Summary
Lifecycle transaction costs and market efficiency are crucial parts of a
comprehensive analysis of diversified products for listed real estate
 Listed real estate contributes to a mixed-asset portfolio (assumption based on
Literature Review)
 In efficient markets passive products are generally superior to actively managed
products (assumption based on Literature Review)
 Listed real estate markets are less efficient than the general stock market
(assumption based on Literature Review)
 Regulatory provisions and product features result in different lifecycle
transaction costs and efficiency levels (qualitative and quantitative
analysis/case study analysis)
ETFs, Index-Certificates and REIT-Funds are not equally well suited
for diversified investment in listed real estate
June 24, 2009
Doctoral Session
12
Discussion