Lecture Sixteen: Institutional Investments (MS PowerPoint)


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Lecture Sixteen: Institutional Investments (MS PowerPoint)

  1. 1. Lecture 16 Institutional Investments
  2. 2. <ul><li>Pension Funds </li></ul><ul><ul><li>Many pension funds have committed 5% or more to the real estate sector </li></ul></ul><ul><ul><li>2004: U.S. Domestic pension funds held over $140 billion in commercial property equity </li></ul></ul><ul><li>Real Estate Investment Trusts (REITS) </li></ul>Institutional Investments
  3. 3. Direct Real Estate Investing vs. Stock and Bond Investing <ul><li>Property assets are relatively illiquid and trade in a multitude of local private markets rather than in centralized public exchanges </li></ul><ul><li>Real estate assets are geographically fixed and must serve space markets that are geographically segmented </li></ul><ul><li>Property assets trade in “whole assets” rather than in small shares </li></ul>
  4. 4. Initial Problems in Direct Real Estate Investment <ul><li>Large sums of money required to purchase assets </li></ul><ul><li>Need for property management and asset management </li></ul><ul><li>Illiquidity of real estate investments </li></ul><ul><ul><li>Longer time required to sell </li></ul></ul><ul><ul><li>More expensive to sell </li></ul></ul>
  5. 5. Lecture 16 Evolution of Real Estate Products for Institutional Investors
  6. 6. Evolution of Real Estate Products for Institutional Investors <ul><li>1970’s: Commingled Real Estate Fund (CREF) </li></ul><ul><ul><li>Similar to Limited Partnerships </li></ul></ul><ul><ul><li>Funds from several pension funds pooled to purchase a diversified portfolio of commercial properties </li></ul></ul><ul><ul><li>Investment Advisor responsible for asset management and investment decisions </li></ul></ul><ul><ul><li>Pension fund investors entitled to their pro-rata share of income and proceeds </li></ul></ul><ul><ul><li>Investors could buy into or cash out any time on the basis of a current appraised value of the CREF shares </li></ul></ul>
  7. 7. Evolution of Real Estate Products for Institutional Investors <ul><li>Late 1980’s: Problems in Real Estate Markets </li></ul><ul><ul><li>S & L deregulations, tax-induced investing, and other sources of money in the market </li></ul></ul><ul><ul><li>Widespread dissatisfaction among pension fund clients, pared with collapse in property markets, created shake-out and consolidation in real estate investment advisory industry through mid-1990’s. </li></ul></ul>
  8. 8. Evolution of Real Estate Products for Institutional Investors <ul><li>1990’s: Serious Interest in Publicly-Traded Real Estate Securities </li></ul><ul><ul><li>Real Estate Investment Trusts (REITs) </li></ul></ul><ul><ul><li>Commercial Mortgage-Backed Securities (CMBS) </li></ul></ul><ul><ul><li>Pension funds still rely on REIT and CMBS shares for their real estate allocations. </li></ul></ul><ul><ul><li>Upturn in commercial property markets offered exciting new prospects and opportunities. </li></ul></ul>
  9. 9. Public vs. Private Asset Markets <ul><li>Liquidity </li></ul><ul><li>Informational Efficiency </li></ul>
  10. 10. Lecture 16 REIT Performance
  11. 11. REIT Growth Since 1989
  12. 12. REIT Growth Since 1989 <ul><li>Before 1992: </li></ul><ul><li>Micro-Cap in Size </li></ul><ul><li>Low Liquidity </li></ul><ul><li>Highly Leveraged </li></ul><ul><li>Variable-Rate Debt </li></ul><ul><li>Advised REITs with little ownership </li></ul><ul><li>Little property-type focus </li></ul><ul><li>Since 1992: </li></ul><ul><li>Small to mid-cap </li></ul><ul><li>Good Liquidity </li></ul><ul><li>Lower leverage – 30% - 60% </li></ul><ul><li>Cheaper debt, some fixed </li></ul><ul><li>Better-aligned interests and ownership </li></ul><ul><li>More property focus </li></ul>
  13. 13. REIT Ownership <ul><li>(as an approximate percentage of the value of all institutional holdings of the same property type) </li></ul><ul><li>Malls: 32% </li></ul><ul><li>Hotels: 17% </li></ul><ul><li>Retail: 13% </li></ul><ul><li>Apartments: 7% </li></ul><ul><li>Office: 6% </li></ul><ul><li>Warehouses: 5% </li></ul>
  14. 14. Lecture 16 REIT Regulation
  15. 15. REIT Regulation <ul><li>REITs cannot be closely-held corporations </li></ul><ul><ul><li>No five or fewer individuals may own more than 50% of the REIT stock; must have at least 100 shareholders </li></ul></ul><ul><li>75% or more of the REIT’s total assets must be real estate, mortgages, cash, or federal government securities, and 75% or more of the REIT’s yearly gross income must be derived directly or indirectly from real estate property </li></ul>
  16. 16. REIT Regulation <ul><li>90% or more of the REIT’s annual taxable income must be distributed to shareholders as annual dividends </li></ul><ul><li>REITs must derive their income from primarily passive sources like rents and mortgage interest, and not from short-term trading and the like. </li></ul>
  17. 17. Lecture 16 Industry Associations
  18. 18. Industry Associations <ul><li>Pension Real Estate Association (PREA) </li></ul><ul><li>National Council of Real Estate Investment Fiduciaries (NCREIF) </li></ul><ul><li>Association for Investment Management and Research (AIMR) </li></ul><ul><li>National Association of Real Estate Investment Trusts (NAREIT) </li></ul><ul><li>Real Estate Research Institute (RERI) </li></ul>