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4/19/2016 Optimizing the Real Estate Allocation … in Today’s Presented to: Secure Retirement for All Conference April 21, 2016 Market Environment Jim Clayton Head of Investment Strategy & Analytics Evolution of Institutional Investment Portfolios Growing importance of “Alternative Investments” Evolution of Institutional Investment Portfolios = Real Estate + other “Real Assets” + … Real Estate well established as a “Mainstream Alternative” ‘95 ‘05 ‘15 1 4/19/2016 Real Estate in a Mixed Asset Portfolio Asset class andEstate “risk(Private buckets” approaches to asset allocation Focusing on Real and REITs) Expected Return Real Assets Stocks Real Estate Bonds Private RE REITs T-bills TIPs RISK Risk Liquidity Inflation Illiquid Market Risk Hedge Implementing the Real Estate (RE) Allocation Evolving and maturing menu of investment products & strategies Cannot invest in RE benchmark indices; must invest in assets and/or funds Evolving definition of “real estate” or composition of the “real estate bucket” Non-traditional or niche sectors Debt as part of the RE allocation 2 4/19/2016 What is Real Estate? + emerging, “niche” sectors = self-storage, medical office, student housing, parking … RE Investment “Styles” or “Risk Buckets” Expected Return Opportunistic Core Plus Value-Added REITs Core Institutions invest in public REITs as both a substitute for core real estate and a liquid complement to adjust real estate holdings. RISK Income Oriented Appreciation Oriented 3 4/19/2016 Within Real Estate Investment “Styles” = Security Market Line 7 Risk Types & Risk Management Framework 1. Market Risks (Systematic) - economy, real estate fundamentals, capital markets 2. Property Specific Risks - age, size, location, life cycle stage, lease structure … 3. Structural/Financial Leverage Risks Many of the property specific & structural risks are dimensions along which the portfolio can be diversified to lower total portfolio return volatility. 4 4/19/2016 Real Estate Has Had a Strong Recovery The times they are a changin’ … transition time with evolving opportunities Investment Themes Today Intersection of cyclical and structural forces Economy + demographic and societal shifts => continued opportunity, but evolving Portfolio tilt away from “beta” toward “alpha” BUT balance with downside protection Submarket and asset selection are key today Supply risks concentrated & may be “different this time” Urban core revitalization and densifying outer nodes Obsolescence of stock 5 4/19/2016 Demographic & Other Structural Tailwinds 25-29 Year Olds Are “Different” Today % Living with Parents % Ever Been Married 80 60 40 20 0 1980 1990 2000 2007 2013 by Lynn Fisher and Jamie Woodwell, Mortgage Bankers Association, July 2015. Source: Cornerstone, U.S. Census and “Millennials, Baby Boomers, and Rebounding Multifamily Home Construction,” by Jordan Rappaport, Federal Reserve Bank of Kansas Economic Review, Second Quarter 2015 Uneven Mortgage Market Recovery Bank and CMBS Lending Lagging and Constrained by Basel III and Dodd-Frank Regulations 300% Loan Originations in 2014-15 Relative to 2006-07 Share of Outstanding Loans Held 4Q 2015 60% 250% 50% 200% 40% 150% 30% 100% 20% 50% 10% 0% 0% TOTAL GSEs Life Ins. Cos. Market share of outstanding loans held Originations in 2014-15 as a % of 2006-07 Commercial & Multifamily Mortgage Originations and Market Share by Lender Type Commercial CMBS Banks Conduits Bars show the relative recovery by lender type as average quarterly loan originations in 2014 and 2015 expressed as a percentage of average quarterly originations in 2006 & 2007. Source: Cornerstone based on data from the Mortgage Bankers Association and the Federal Reserve. 6 4/19/2016 That’s it. Thank you for your attention! Jim Clayton Head of Investment Strategy & Analytics Cornerstone Real Estate Advisers Enjoy the rest of the conference … (860) 509-2237 [email protected] Confidential Disclosure Statement This information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic or other decisions. This analysis does not make any recommendation about your investments, and should not be considered investment advice. Any opinions expressed herein reflect our judgment at this date and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Opinions and estimates offered herein are subject to change without notice, as are statements of market trends, which are based upon current market conditions. 7