Real Estate Investment and Finance

Strategies, Structures, Decisions

David Hartzell, Andrew E. Baum

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119526155
• Edition: 2
• Topic: Business
• Subtopic: Finanza
• Index: Business

The fully revised and updated version of the leading textbook on real estate investment, emphasising real estate cycles and the availability and flow of global capital

Real Estate Investment remains the most influential textbook on the subject, used in top-tier colleges and universities worldwide. Its unique, practical perspective on international real estate investment focusses on real-world techniques which measure, benchmark, forecast and manage property investments as an asset class. The text examines global property markets and real estate cycles, outlines market fundamentals and explains asset pricing and portfolio theory in the context of real estate.

In the years since the text's first publication, conditions in global real estate markets have changed considerably following the financial crisis of 2008-2009. Real estate asset prices have increased past pre-crisis levels, signalling a general market recovery. Previously scarce debt and equity capital is now abundant, while many institutions once averse to acquiring property are re-entering the markets. The latest edition – extensively revised and updated to address current market trends and practices as well as reflect feedback from instructors and students – features new content on real estate development, improved practical examples, expanded case studies and more. This seminal textbook:

• Emphasises practical solutions to real investing problems rather than complex theory
• Offers substantial new and revised content throughout the text
• Covers topics such as valuation, leasing, mortgages, real estate funds, underwriting and private and public equity real estate
• Features up-to-date sections on performance measurement, real estate debt markets and building and managing real estate portfolios
• Includes access to a re-designed companion website containing numerous problems and solutions, presentation slides and additional instructor and student resources

Written by internationally-recognised experts in capital management and institutional property investing strategies, Real Estate Investment, Second Edition: Strategies, Structures, Decisions is an indispensable textbook for instructors and students of real estate fund management, investment management and investment banking, as well as a valuable reference text for analysts, researchers, investment managers, investment bankers and asset managers.

PART One
Real Estate as an Investment: An Introduction

CHAPTER 1
Real Estate – The Global Asset

1.1 THE GLOBAL PROPERTY INVESTMENT UNIVERSE

Real estate is usually identified as a discrete, or separate, component of an investment portfolio. It may be part of an allocation to ‘alternatives’ (financial assets that do not fall into one of the conventional investment categories of stocks, bonds, and cash); it may be part of an allocation to ‘real assets’ (physical assets that have an intrinsic worth and which are expected to be a hedge against inflation); or it may be part of an allocation to private markets (assets such as private equity or private debt which are not listed on a public exchange). Whichever is the case, real estate (including owner-occupied housing and farmland) constitutes a very large proportion of the world's wealth and (excluding these asset types) a significant slice of its institutional savings base.

What proportion of an investment portfolio should be in real estate? What proportion of the real estate portfolio should be invested in the USA, 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 less good at forecasting market returns than we think we are.

We can estimate the size of the public equity markets at any time by adding together the market capitalisation of the various global stock markets. We can do the same 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. 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 gross domestic product (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 may 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 owned by institutional investors around the world was estimated (by CBRE, 2017) to be around $27.5 trillion and by Property Funds Research (PFR) and others in 2019 at around £35 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 capitalisation of close to $69 trillion in January 2019 (World Federation of Exchanges). Assuming a typical equity exposure ...