Global Property Investment

Strategies, Structures, Decisions

Andrew E. Baum, David Hartzell

• Publisher: Wiley-Blackwell
• Year: 2011
• Print ISBN: 9781444335286, 9781444361957
• eBook ISBN: 9781444347265
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Developments in the sophistication of global real estate markets mean that global real estate investment is now being executed professionally. Thanks to academic enquiry, professional analysis and entrepreneurial activity, backed by the globalisation of all investment activity, there is now an available body of material which forms the basis of this scholarly but practical summary of the new state of this art.

The measurement, benchmarking, forecasting and quantitative management techniques applied to property investments are now compatible with those used in other asset classes, and advances in property research have at last put the ongoing debate about the role of real estate onto a footing of solid evidence.

The truly global scope and authorship of this book is unique, and both authors here are singularly well qualified to summarise the impact and likely future of global innovations in property research and fund management. Between them, they have experienced three real estate crashes, and have observed at first hand the creation of the real estate debt and equity instruments that led to the global crisis of 2008-9.

Global Property Investment: strategies, structure, decisions offers a unique perspective of the international real estate investment industry with:

• a close focus on solutions to real life investment problems
• no excessive theoretical padding
• a target of both students and professionals
• highly qualified dual-nationality authorship

With many cases, problems and solutions presented throughout the book, and a companion website used for deeper analysis and slides presentations (see below), this is a key text for higher-level real estate students on BSc, MSc, MPhil and MBA courses worldwide as well as for practising property professionals worldwide in fund management, investment and asset management, banking and real estate advisory firms.

Part One
Real Estate as an Investment: An Introduction

1. Chapter 1: Real estate – the global asset
2. Chapter 2: Global property markets and real estate cycles
3. Chapter 3: Market fundamentals and rent
4. Chapter 4: Asset pricing, portfolio theory and real estate

Chapter 1
Real estate – the global asset

1.1 The Global Property Investment Universe

What proportion of an investment portfolio should be in real estate? What proportion of the real estate portfolio should be invested in the US, or Russia, or continental Europe?

A new investor building a global portfolio might reasonably want to know the composition by value of the ‘market portfolio’ – the total value of all investable assets, like stocks and bonds, added together. Given this, it is possible to imagine how your portfolio might be constituted, even if you had no views about the future performance of those assets. Assuming there were no ‘friction costs’, meaning the time and cost involved in accessing certain markets, which makes some less attractive than others, constructing a market portfolio would make some sense, especially given that it appears that we are not as good at forecasting market returns as we think we are.

We can estimate the size of the public equity markets at any time by adding together the market capitalization of the various global stock markets. We can do something similar with publicly-listed bonds. Private equity is more of a challenge, however, and real estate also creates significant difficulties. Many of the real estate assets in the world are never valued. Nobody knows the total value of the agricultural land in central Asia. There is a lack of transparency in many markets, and the generally low levels of information available in Asia and the emerging markets of the world mean that we do not know much about the size of the investable property markets in China, India and Pakistan, despite their huge populations and increasingly significant GDP. Even the total value of all US housing is subject to debate.

Nevertheless, we do have something to go on. While it has been estimated that real estate might comprise as much as 50% of the total value of the world’s assets, this might not represent the value of the investable stock (after all, we have no intention of selling our homes in North Carolina and Oxfordshire to a sovereign wealth fund). We have no easy way of estimating the investable stock either, but we can have a stab at estimating the invested stock and adjusting that value upwards. This is the approach typically taken by analysts.

The value of the investable stock of commercial property available to institutional investors around the world has been estimated (by DTZ, 2008 and RREEF, 2007, among others) to be around $16 trillion. This is defined as stock that is of sufficient quality to become the focus of institutional investment. This estimate must be taken as the broadest possible guide. This value can be compared with a global equity market capitalization of close to $46 trillion in January 2010 (World Federation of Exchanges, 2010). Given a typical equity exposure of around 50%, this suggests a market portfolio weight for real estate of around 17%. Institutional exposure (averaging around 8% globally – see Table 1.1) remains below the market portfolio weight, suggesting that something appears to limit institutional investors’ commitment to this asset class.

Table 1.1: The global property investment universe ($bn)

Source: Property Funds Research, IMF, Pramerica REI, Chin and Dziewulska, 2006

The $16 trillion investable stock of property can be broken down to the regional level. According to similar sources, the global market is split by asset value into 33% North America, 32% Europe, 27% Asia and the remaining 8% in the smaller regions.

The US (at 30%) and Japan (at 17%) are the two largest country markets in the world. The UK constitutes around 25% of all European institutional real estate and around 11% of global institutional real estate, the third-largest global market.

Return performance in the US institutional real estate investment market is measured by the National Council of Real Estate Investment Fiduciaries (NCREIF) whose NCREIF Property Index (NPI) consists of 6,057 investment-grade, income producing properties with a total value of $238 billion at the third quarter of 2010. The breakdown of the portfolio is 34.8% offices, 25.1% apartments, 23.9% retail, 14.3% industrial and 1.9% hotels. Geographically, the NPI has 34.7% in the East, 32.9% in the West, 21.8% in the South and 10.6% in the Midwest.

In 2005 Key and Law estimated the total value of all commercial property in the UK to exceed £600 billion (a figure which includes the institutional market of £106 billion). Within this £600 billion, they estimate that 33% is retail property, 26% office property and 21% industrial property. The remaining 20% covers a wide range of property including hotels, pubs, leisure, utilities and public service buildings. The universe that was used to compile the IPD UK annual index at the end of 2007 comprised over 12,000 properties worth around €285 billion (£184 billion at the then current exchange rate).

A truly global real estate benchmark is approaching. For example, the IPD Global Property Index measures the combined performance of real estate markets in 23 countries. The Index is based on the IPD indices for Australia, Austria, Belgium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Poland, Portugal, South Africa, Spain, Sweden, Switzerland, UK, US and the KTI Index for Finland.

As we shall see in Part Two of this book, ownership of this global universe is financed through equity (some private, and some public, such as that raised by public property companies) and debt (some private, such as mortgages, and some public, such as commercial mortgage-backed securities). This classification is known in the US as the ‘capital stack’ and breaks down as shown in Table 1.2.

Table 1.2: The global real estate ‘capital stack’ (%)

Source: DTZ, 2010

The make-up of the private equity pot has recently changed as direct property ownership has been converted into fund formats, and public equity has grown as the Real Estate Investment Trust (REIT) format has been applied to more and more countries outside its US home.

UK-based consultant Property Funds Research (PFR) estimated in 2009 that 70% of the global property universe is held directly, while 17% is held in listed form and 13.4% is owned by private funds. Surveys suggest that there is a potential for much further growth in funds. In the long run, it is reasonable to suppose that more listed and unlisted property funds will follow to convert the huge pool of government and owner-occupier-held property into an investable form. It is expected that growth i...

Table of contents

• Cover
• Dedication
• Title
• Copyright
• Preface
• Acknowledgements
• Part One: Real Estate as an Investment: An Introduction
• Part Two: Making Investment Decisions at the Property Level
• Part Three: Real Estate Investment Structures
• Part Four: Creating a Global Real Estate Strategy
• References
• Glossary
• Index
• End User License Agreement