Real Estate Investment and Finance: Strategies, Structures, Decisions

ISBN-13: 9781119526094 / Angielski / Twarda / 2021 / 592 str.

Andrew E. Baum; David Hartzell

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Acknowledgements xxiAbout the Authors xxiiiPreface xxvPart One Real Estate as an Investment: An IntroductionChapter 1 Real Estate - The Global Asset 31.1 The Global Property Investment Universe 31.2 Market Players 61.2.1 Investors 61.2.2 Fund Managers 91.2.3 Advisors 91.3 Property - Its Character as an Asset Class 111.3.1 Property Depreciates 121.3.2 Lease Contracts Control Cash Flows 131.3.3 The Supply Side is Inelastic 131.3.4 Valuations Influence Performance 141.3.5 Property is Not Liquid 151.3.6 Large Lot Sizes Produce Specific Risk 161.3.7 Leverage is Commonly Used in Real Estate Investment 181.3.8 Property Appears to be an Inflation Hedge 191.3.9 Property is a Medium-Risk Asset 211.3.10 Real Estate Cycles Control Returns 221.3.11 Property Appears to be a Diversifying Asset 24Specific Risk 27Leverage 27Illiquidity 28Taxes, Currency, and Fees 281.4 Conclusion 28Chapter 2 Global Property Markets and Real Estate Cycles, 1950-2020 332.1 Introduction and Background 332.1.1 The Property Cycle 332.2 A Performance History 342.2.1 Before 1970: Real Estate Becomes a Medium-Return Asset 342.2.2 The 1970s: Inflation, Boom, and Bust 36The USA 36The UK 372.2.3 The 1980s: New Investors Flood the Real Estate Capital Market 38The USA 38The UK 422.2.4 The 1990s: The Rise of REITs 43The USA 43The UK: Deep Recession, Low Inflation, and Globalization 452.2.5 2002-7: A Rising Tide Lifts All Boats 47The USA 47The UK 592.2.6 The Global Real Estate Credit Crisis Hits 60The USA 60The UK 672.2.7 The Markets Recover Post-crisis 702.3 The Global Market 722.3.1 The European Market Develops 722.3.2 Asia Emerges 752.4 Real Estate Cycles: Conclusion 80Lesson 1: Too Much Lending to Property is Dangerous 80Lesson 2: Yields are Mean-Reverting - Unless Real Risk-Free Rates Change 81Lesson 3: Look at Yields on Index-Linked 81Chapter 3 Market Fundamentals and Rent 833.1 Introduction: The Global Property Cycle and Rent 833.2 The Economics of Rent 843.2.1 Rent and Operational Profits 843.2.2 Theories of Rent 86Ricardo 86von Thünen 87Fisher 893.2.3 Rent as the Price of Space 903.2.4 Supply 913.2.5 Demand 93The Cyclical Demand for Space 93The Structural Demand for Space 94Variations in Locational Demand by Use 953.2.6 The Relationship Between Rental Value and Rental Income 973.2.7 The Impact of Currency Movements on Rent 993.2.8 Property Rents and Inflation 993.3 Forecasting Rents 1013.3.1 Forecasting National Rents 101Model Types 101Price 102Demand 102Supply 102Building the Model 104An Historical Model 104A Forecasting Model 1053.3.2 Forecasting at the Local Level 105Conceptual and Modelling Problems 106Data Issues 1063.4 Conclusion 107Chapter 4 Asset Pricing, Portfolio Theory, and Real Estate 1094.1 Risk, Return, and Portfolio Theory 1094.1.1 Introduction 1094.1.2 Risk and Return 1104.1.3 Portfolio Theory 111The Efficient Frontier 1114.1.4 Risk and Competitors 1124.1.5 Risk and Liabilities 1134.1.6 Property Portfolio Management in Practice 113The Investment Strategy 1144.2 A Property Appraisal Model 1154.2.1 Introduction: The Excess Return 1154.2.2 The Cap Rate or Initial Yield - A Simple Price Indicator 116UK Terminology 116US Terminology 117How are Cap Rates Estimated in Practice? 118Cap Rates are the Inverse of Price/Earnings Ratios 118What Drives the Cap Rate? 1194.2.3 The Fisher Equation 1214.2.4 A Simple Cash Flow Model 1214.2.5 Gordon's Growth Model (Constant Income Growth) 1224.2.6 A Property Valuation Model Including Depreciation 1224.3 The Model Components 1234.3.1 The Risk-Free Rate 1234.3.2 The Risk Premium 124What is Risk? 124The Capital Asset Pricing Model 1254.3.3 Inflation 1274.3.4 Real Rental Growth 1284.3.5 Depreciation 1284.3.6 'Correct' Yields 1294.3.7 An Analysis in Real Terms 1294.4 The Required Return for Property Assets 1304.4.1 The Sector Premium 1304.4.2 The City Premium 1314.4.3 The Property Premium 1314.4.4 Example 131Tenant 131Tenure 132Leases 132Building 132Location 1324.5 Forecasting Real Estate Returns 1354.5.1 The Origin and Uses of Property Forecasts 1354.5.2 Forecasting Cap Rates 1364.5.3 Forecasting Property Cash Flows 1384.5.4 The Portfolio Model 1384.5.5 Example 1394.5.6 Fair Value Analysis 1414.6 Conclusion: A Simple Way to Think About Real Estate Returns 141Part Two Making Investment Decisions at the Property LevelChapter 5 Basic Valuation and Investment Analysis 1455.1 Introduction 1455.1.1 Cash Flow 1465.1.2 Risk and the Discount Rate 1475.1.3 Determining Price 1475.1.4 Determining Return 1485.2 Estimating Future Cash Flows 1485.2.1 Introduction 1485.2.2 Holding Period 1495.2.3 Lease Rent 1495.2.4 Resale Price 149Estimated Rental Value at Resale 150Going-Out Capitalisation Rate 1505.2.5 Depreciation 1505.2.6 Expenses 152Fees 152Taxes 152Debt Finance (Interest) 1535.3 The Discount Rate 1535.4 Conclusion 156Chapter 6 Leasing 1596.1 Introduction 1596.2 Legal Characteristics of Leases 1606.3 The Leasing Process 1616.4 Important Economic Elements of a Lease 1616.4.1 The Term of the Lease 1626.4.2 Base Rent and Rent Escalation Provisions 1626.4.3 Options 163Renewal Options 163Expansion, Contraction, and Termination Options 1636.4.4 Measurement of Space 1646.4.5 Expense Treatment 165Gross Lease 165Triple Net Lease 1686.4.6 Concessions: Tenant Improvement Allowance and Rental Abatement 170Tenant Improvement Allowance or Tenant Upfit/Fitout 170Rental Abatement (Rent-Free Periods) 1716.4.7 Brokerage Commissions 1726.4.8 Other Key Elements of a Lease 1746.4.9 Leasing Differences Across Property Types 1756.5 Lease Economics and Effective Rent 1776.5.1 Comparing Leases with Different Expense Treatment 177The Landlord's Perspective 177The Tenant's Perspective 1786.5.2 Comparing Leases with Different Concession Allowances 179Landlord's Perspective 180Tenant's Perspective 1816.6 Conclusions 183Appendix: Modeling Lease Flexibility In The Uk 183Example 185Assumptions 185Result 185Explanation 186Chapter 7 Techniques for Valuing Commercial Real Estate and Determining Feasibility: The Unleveraged Case 1877.1 Introduction 1877.2 Background on the Investment Opportunity 1887.2.1 Project Details 1887.2.2 Where Do You Find Information About Income and Expenses? 1897.3 Developing a Pro Forma Income Statement 1907.3.1 Calculating Total Revenues 1917.3.2 Estimating Vacancy Loss 1917.3.3 Estimating Operating Expenses 1927.3.4 Calculating Net Operating Income 1937.4 Valuation Using Net Operating Income: Single-Year Cash Flow 1937.4.1 An Aside on Capitalization Rates 194Estimating the Market Cap Rate 194Cap Rates are the Inverse of Price/Earnings Ratios 195Using Cap Rates to Value the Apartment Project 195Calculating the Implied Cap Rate for the Apartment Investment Opportunity 1967.5 Investment Analysis Using Operating Income: Multiple-Year Cash Flows 1977.5.1 Operating Cash Flows from Leasing 1977.5.2 Cash Flows from Disposition 1987.6 Applying Discounted Cash Flow to Analyze Investment Feasibility 2007.6.1 Determining Feasibility 2007.6.2 Equity Multiple 2007.6.3 Partitioning the Internal Rate of Return 2017.6.4 Calculating the Maximum Price to Pay 2027.7 Sensitivity Analysis 2027.8 Conclusion 203Chapter 8 Mortgages: An Introduction 2058.1 Introduction 2058.2 What is a Mortgage? 2068.2.1 Promissory Note 2068.2.2 Mortgage Instrument 2068.3 The Risks and Returns of Mortgage Investment 2078.4 The Financial Components of a Mortgage 2088.4.1 The Bond Component 2088.4.2 The Call Option Component 2088.4.3 The Put Option Component 2098.5 The Mortgage Menu 2108.5.1 Fixed or Floating-Rate Loans 2108.5.2 Fully or Partially Amortizing Loans 2118.6 An Introduction to Mortgage Math 2128.6.1 Calculating the Monthly Payment 2128.6.2 The Mortgage Loan Constant 2138.6.3 The Amortization Schedule 2138.6.4 Converting from the Contract Rate to the Compounded Rate 2178.6.5 Determining the Cost of Borrowing 217Borrowing Cost without Up-front Fees 217Borrowing Costs when the Lender Charges Fees 219Borrowing Costs when the Loan is Prepaid Prior to Maturity 2208.7 Calculating Prepayment Penalties 2208.7.1 Lockout Periods 2218.7.2 Step-down Prepayment Penalties 2218.7.3 Yield Maintenance Penalties and Yield Calculations 2228.7.4 Treasury Flat Prepayment Penalty 2258.7.5 Defeasance 2288.8 Conclusion 228Chapter 9 Commercial Mortgage Underwriting and Leveraged Feasibility Analysis 2299.1 Introduction 2299.2 Mortgage Underwriting and the Underwriting Process 2299.2.1 Ratios and Rules of Thumb 230Loan-to-Value Ratio 230Debt Coverage Ratio 230Debt Yield 2329.2.2 Determining the Maximum Loan Amount 232Operating Expense Ratio 236Breakeven Ratio 236Debt Yield 2379.3 Investment Feasibility with Leverage: Before-Tax Analysis 2389.3.1 The Two-Part Nature of Cash Flows: Operating Income and Disposition Income 2389.3.2 Financing Impact on Investor Income Statements: Adding Debt Service Cash Flows 238Income from Disposition 2399.3.3 Determining Investment Feasibility: The Leveraged Before-Tax Case 240Static or Single-Year Measures of Investment Performance 240Determining Investment Feasibility Using Multiple Year Cash Flows 242Equity Multiple 242Partitioning the IRR and NPV 242Determining the Maximum Price to Pay with Leverage 2439.4 Sensitivity Analysis 2449.5 Conclusion 245Chapter 10 Real Estate Development 24710.1 Introduction 24710.2 The Development Process 24810.3 Preliminary Analysis of "The Station" Development 25010.3.1 "Back-of-the-Envelope" Analysis 250Estimating Construction Costs 251Estimating Market Value 25110.3.2 Adding Construction Financing 25310.3.3 Sensitivity Analysis 25410.4 Formal Analysis of Development of "The Station" 25710.5 Budget for "The Station" Office Project 25810.6 Financing Development 25910.6.1 Stage One: Pre-construction 26010.6.2 Stage Two: Construction 260Construction Loan Calculations 26010.6.3 Stage Three: Lease-Up 26310.6.4 Stage Four: Operations 264Lender Yield Calculation for the Construction Loan 26410.7 Developer Profit and Return 26510.8 Comparison to "Back-of-the-Envelope" Analysis 26610.9 A London Office Development Through the Cycle 26710.10 Conclusion 274Part Three Real Estate Investment StructuresChapter 11 Unlisted Real Estate Funds 27711.1 Introduction to Unlisted Real Estate Funds 27711.1.1 The US Market 27811.1.2 The Global Market 27811.2 The Growth of the Unlisted Real Estate Fund Market 28011.2.1 The Global Unlisted Property Market Universe 28111.2.2 How Much Global Real Estate is in Unlisted Funds? 28311.3 Unlisted Fund Structures 28411.3.1 Open-Ended Funds 28511.3.2 Closed-Ended Funds 28611.3.3 Funds of Funds 28711.4 Characteristics of Unlisted Real Estate Funds 28811.4.1 Style 28811.4.2 Investment Restrictions 28911.4.3 Property Sector and Geographic Focus 29011.5 Liquidity and Valuation Issues 29111.5.1 Liquidity 29111.5.2 Valuation 29411.6 The Case for and Against Unlisted Real Estate Funds 29411.6.1 The Case for Unlisted Real Estate Funds 294Unlisted Real Estate Funds can Diversify Real Estate-Specific Risk 294Unlisted Funds are Priced by Reference to NAV 294Unlisted Funds Provide Access to Specialist Managers 29511.6.2 The Case Against Unlisted Real Estate Funds 295The Drawdown Profile 295Gearing and the J-curve Effect 296Fees and Performance Persistence 297Do Trading Prices Track NAV? 29711.7 Conclusion 300Chapter 12 Real Estate Private Equity: Fund Structure and Cash Flow Distribution 30112.1 Introduction: The Four Quadrants and Private Equity 30112.2 Private Equity Fund Background 30312.3 The Lifecycle of a Private Equity Fund 30412.3.1 Initial Fundraising 30412.3.2 Acquisition Stage 30512.3.3 Asset Management 30612.3.4 Portfolio Management 30612.3.5 End of Fund Life 30712.4 Fund Economics 30712.4.1 Management Fees 30712.4.2 Limited Partner Distributions 307Return of Initial Capital 308Preferred Return 308Carried Interest 308Promoted Interest 30912.5 Waterfall Structures 31012.5.1 Introduction 31012.5.2 Pro-rata Investment and Distribution 31112.5.3 All Equity Provided by Limited Partner, 80%/20% Carried Interest 31112.5.4 Adding a Preferred Return 31212.5.5 Return of Capital, Simple Interest Preferred Return, Carried Interest 314Adding Management Fees 31612.5.6 Return of Capital, Compounded Interest Preferred Return, Carried Interest 31712.6 Private Equity Structures in the Credit Crisis 31912.7 Conclusion 321Chapter 13 Listed Equity Real Estate 32313.1 Introduction 32313.2 REITs and REOCS 32413.3 Listed Funds and Mutual Funds 32413.4 Exchange-Traded Funds 32513.5 The US REIT Experience 32513.5.1 Introduction 32513.5.2 Distributions 32613.5.3 Measuring REIT Net Income 327Defining Net Income 327Funds from Operations 32913.5.4 Performance 332Summary 33513.6 The Global Market 33513.6.1 The Global Property Company Universe 33513.6.2 The Global REIT Universe 33513.6.3 The UK REIT 33813.7 REIT Pricing 33913.7.1 Using Earnings to Value REITs 33913.7.2 Market Capitalization and Net Asset Value 34013.7.3 Premium or Discount to NAV? 340Instant Exposure 341Liquidity/Divisibility 342Asset Values are Higher than the Reported NAV 342Projected Asset Values are Expected to Exceed the Reported NAV 342Management Skills 342Tax 343Debt 34313.8 Conclusion 343Chapter 14 Real Estate Debt Markets 34514.1 Introduction 34514.2 A Brief History Lesson 34714.2.1 Banking in the 1960s and 1970s 34714.2.2 The Volcker Era of High and Volatile Interest Rates 34914.3 Wall Street Act I: The Early ResidentialMortgage-Backed Securities Market 34914.3.1 The Securitization Process Explained 35014.3.2 Lender Profitability from Securitization 35314.4 Wall Street Act II: Senior-Subordinated Securities, the Advent of Structured Finance 35414.4.1 The Coast Federal Savings and Loan Deal 35414.4.2 Risk and Return Characteristics of the Senior-Subordinated Structures 35814.5 Wall Street Act III: The Evolution of Structured Finance 35914.5.1 An Updated Look at the Senior-Subordinated Security 35914.5.2 Who Profits from these Transactions? 36214.6 Collateralized Debt Obligations 36314.7 Mezzanine Debt 36514.7.1 Mezzanine: The Background 36514.7.2 Mezzanine Structures 36614.7.3 A UK Example 36814.8 Whole Loans and Synthetic Mezzanine 36814.9 Income Strips 36914.10 Cash-out Refinancing 37114.11 All Good Things Must Come to an End 37314.11.1 The Cash-out Refinancing Example Extended 37414.12 Post-crisis Recovery 38114.12.1 A Final Update to the Cash-out Refinancing Example 38214.13 Conclusion 383Part Four Creating a Property Investment PortfolioChapter 15 Building the Portfolio 38715.1 The Top-Down Portfolio Construction Process 38715.1.1 Introduction 38715.1.2 Risk and Return Objectives 390The Relative Return Target 392The Absolute Return Target 39315.1.3 Benchmarks 39415.2 Strengths, Weaknesses, Constraints: Portfolio Analysis 39415.2.1 Current Portfolio Structure 39415.2.2 Strengths, Weaknesses, Constraints 39515.2.3 Structure and Stock Selection 39515.3 Portfolio Construction 39715.3.1 Top-Down or Bottom-Up? 39715.3.2 Mixing Listed and Unlisted Real Estate 39815.3.3 Can Real Estate Investors Build Efficient Portfolios? 40015.3.4 Possible Approaches 403Case 1: Large US Endowment Fund 403Case 2: UK Family Office 40615.4 Conclusion 409Chapter 16 International Real Estate Investment: Issues 41116.1 Introduction: The Growth of Cross-Border Real Estate Capital 41116.2 The Global Real Estate Market 41316.2.1 The Global Universe 41316.2.2 Core, Developing, Emerging 41316.2.3 Transparency 41416.2.4 The Limits to Globalisation 41416.3 The Case for International Real Estate Investment 41516.3.1 The Case for International Real Estate Investment: Diversification 41516.3.2 The Case for International Real Estate Investment: Enhanced Return 41716.3.3 Other Drivers of International Property Investment 41816.4 The Problems 41916.4.1 Introduction 41916.4.2 Index Replication and Tracking Error 41916.4.3 Leverage 42016.4.4 Global Cycles, Converging Markets 42016.4.5 Execution Challenges 42116.4.6 Loss of Focus and Specialisation 42116.5 Formal Barriers 42116.5.1 Legal Barriers 42116.5.2 Capital Controls 42216.5.3 Tax 42216.6 Informal Barriers 42516.6.1 Introduction 42516.6.2 Currency Risk 42516.6.3 Legal and Title Risk 42616.6.4 Liquidity Risk 42716.6.5 Geographical Barriers 42716.6.6 Political Risk 42816.6.7 Cultural Barriers 42816.6.8 Information Asymmetry 42916.7 A Pricing Approach for International Property 42916.7.1 Example 42916.7.2 Theories of Interest Rates and Exchange Rates 431The Law of One Price 431Absolute Purchasing Power Parity 431Relative Purchasing Power Parity 432The Monetary Model of Exchange Rates 432The Fisher Equation 432Interest Rate Parity 432Putting Relative Purchasing Power Parity and Interest Rate Parity Together with the Fisher Equation 43216.7.3 Putting Theory into Practice 43316.7.4 Using Local Excess Returns 43816.8 Managing Currency Exposure and Currency Risk 44116.8.1 Diversifying 44216.8.2 Using a 'Currency Overlay' 44216.8.3 Using Local Debt 44316.8.4 Hedging Equity 44416.8.5 Leverage, Tax, and Fees 44616.9 Building a Portfolio 44716.10 Conclusion 450Chapter 17 Performance Measurement and Attribution 45117.1 Performance Measurement: An Introduction 45117.2 Return Measures 45217.2.1 Introduction 452Income Return 453Capital Return 453Total Return 453Time-Weighted Return 454Internal Rate of Return 45417.2.2 Example: IRR, TWRR, or Total Return? 454IRR or TWRR? 456IRR or Total Return? 45617.2.3 Required and Delivered Returns 456The Required Return 456The Delivered Return 45817.2.4 Capital Expenditure 459Timing of Expenditure 46017.2.5 Risk-Adjusted Measures of Performance 46017.3 Attribution Analysis: Sources of Return 46217.3.1 Changes in Initial Yields 46217.3.2 The Combined Impact 46417.4 Attribution Analysis: The Property Level 46517.5 Attribution Analysis: The Portfolio Level 46717.5.1 Introduction 46717.5.2 The Choice of Segmentation 46817.5.3 Style 46917.5.4 Themes 47017.5.5 City or Metropolitan Statistical Area Selection 47117.5.6 Two or Three Terms? 47117.5.7 The Formulae 47217.5.8 Results from Different Attribution Methods 473Case 1 474Case 2 47417.6 Attribution and Portfolio Management: Alpha and Beta 47417.6.1 Alpha and Beta Attribution: An Introduction 47417.6.2 Sources of Alpha and Beta 47617.7 Performance Measurement and Return Attribution for Property Funds 47717.7.1 Introduction 47717.7.2 The Asymmetry of Performance Fees 47817.7.3 An Attribution System for Funds 48017.7.4 Alpha and Beta in Property Funds: A Case Study 48217.7.5 Unlisted Fund Performance: Empirical Evidence 485The Data 485Relative Returns 486Alpha and Beta 486Timing: IRR and TWRR 488IRRs and Vintage Year 48817.8 Conclusion 489Chapter 18 Conclusions 49118.1 Why Property? 49118.2 Lessons Learned 49318.2.1 Liquid Structures 49318.2.2 Unlisted Funds 49418.2.3 International Investing 49518.2.4 Best-Practice Real Estate Investing 49518.2.5 Pricing 49618.3 The Future 49618.3.1 The PropTech Explosion 49618.3.2 Smart Buildings and ESG 49918.3.3 Occupier Markets: Space as a Service 49918.3.4 Fractionalization and Liquidity 500Liquidity and Faster Transactions 500Tokenization and Fractionalization 50218.3.5 Derivatives 50218.4 Conclusion 504References 509Glossary 515Index 527

O autorze

DAVID HARTZELL is Steven D. Bell and Leonard W. Wood Distinguished Professor of Finance and Real Estate and Director, Wood Center for Real Estate Studies, University of North Carolina. He is a Fellow of the Private Equity Research Consortium, Kenan Institute and serves on the Board of Directors of Highwoods Properties, a publicly traded Real Estate Investment Trust (REIT), and has served on the Investment Advisory Committee of the $100 billion North Carolina Retirement System.ANDREW BAUM is Professor of Practice, Saïd Business School, University of Oxford and Professor Emeritus, University of Reading. He is Director of the Oxford Future of Real Estate Initiative, Chairman of Newcore Capital Management, and has held senior executive and non-executive positions with Grosvenor, The Crown Estate, CBRE Global Investors and others.