Presentation Transcript

1. Commercial Real EstateRisk and Opportunities

2. Real Estate Capitalization Comparisons Source: U.S. Federal Reserve, Flow of Funds, Table B100, B102 and L4
3. “Risk” and return of various investments Why do the NCREIF and NAREIT have similar average returns, yet wildly different standard deviations?
4. REIT Performance Source: Yearly NAREIT/Standard & Poor Calibrated to Jan 1990 = 100
5. Recent REIT Performance
6. Systematic Risk of Real Estate Important point: not all real estate is alike Estimated betas across property types, using 1980-2011 return data Hotels: 1.2 (0.09) Regional Malls: 1.0 (0.09) All Equity REITs: 0.9 (0.05) Office & Industrial: 0.8 (0.12) Multifamily: 0.5 (0.09) Why do these differ?
7. Real Estate Investments Real Estate Risks Real Estate Investment Vehicles
8. Real Estate Investments Real Estate Risks Real Estate Investment Vehicles
9. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
10. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
11. Expected Core Real Estate Returns
12. Lower real interest rates raise asset prices Since P/R is approximately 1/cap rate, prices rise when interest rates fall
13. Asset prices are more sensitive tointerest rate changes when rates are low As interest rates fall, each successive decline has a larger percentage effect on a lower base Leads to an accelerating effect of falling interest rates And a cooling effect of rising real rates
14. US Treasury Yield US Daily Treasury Yield, 1990 – Feb 2013
15. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
16. High rent-growth cities (the coasts)have lower cap rates Future growth in rents reduces required cash yield Generates more volatility in hot markets Assuming risk is the same
17. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
18. Foreign Acquisitions of US Property (trailing 12 months, office, industrial, apartment, retail properties) Source: Real Capital Analytics, January 2008 rcanalytics.com
19. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
20. ...not just in the US Source: Real Capital Analytics, January 2008– rcanalytics.com
21. Subordination levels over time Source: Moodys; Christopher Mayer
22. CMBS has brought cheaper debt to real estate: CMBS spreads have fallen since 2001 Source: Bear Stearns, CMBS alert
23. CMBS Issuance Source: Bloomberg
24. National CPPI Indices Source: Real Capital Analytics, Geltner & Associates
25. Real estate never goes down CNBC Interview with Ben Bernanke July 1, 2005: When asked about a housing bubble Bernanke responded: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it‘s gonna drive the economy too far from its full employment path, though.”
26. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
27. …. and then increased sharply Source: www.crenews.com
28. Historical CMBS Issuance
29. NCREIF Cap Rates
30. National CPPI Indices Source: Bloomberg
31. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
32. Supply and Demand
33. Supply and Demand
34. Supply and Demand
35. Supply and Demand
36. Supply and Demand
37. Real Estate Investment Risks Real Estate Risks Asset pricing fundamentals High sensitivity to interest rates Especially in high-growth markets No longer insulated from world capital markets Priced as if no risk Credit shortages Demand/supply fundamentals Overbuilding leads to cycles Real Estate Investment Vehicles
38. Real Estate Investments Real Estate Risks Real Estate Investment Vehicles REIT CMBS
39. Real Estate Investment Trusts (REITs) Overview Real Estate Investment Trusts Publicly-traded real estate company Creation of the Internal Revenue Code Typically owner-operators of income-producing properties (Equity REITs) Also: Mortgage Hybrid Health care, etc.
40. Real Estate Investment Trusts (REITs) Overview Goal: to enable small investors to invest in real estate Mimics favorable features of partnerships Pass-through entity Single level of taxation (shareholder only)
41. REIT Operating Restrictions REITs do not pay taxes at the corporate level, but… 75%+ of assets must be invested in real estate assets, cash, or government securities Other REIT shares are considered real estate assets 75%+ of gross income must be derived from rents, mortgage interest, or gains from the sale of real estate Can have taxable REIT subsidiaries 90%+ of GAAP taxable income must be distributed annually to shareholders
42. Growth of REIT Market Capitalization REIT Market Capitalization ($Millions), 1980-2012 Source: NAREIT *Data through Dec 31, 2011
43. REIT Performance
44. Recent Performance - NAREIT Investment Performance by Property Sector and Subsector FTSE NAREIT
45. 14 REITs in the S&P(Constituent Information as of October, 2012)
46. REITs and Real Estate exposure Estimate linear regression of return on REITs as a function of stock and real estate market returns Plus various control variables REIT i return, year t Risk-free rate, year t Real estate shadow portfolio return for REIT i, year t Stock market return, year t
47. REIT vs. Shadow Portfolio
48. Dependent Variable: Change in NAV
49. Dependent Variable: Unlevered REIT (lagged) – Risk-free rate
50. REIT vs. Shadow Portfolio
51. REIT vs. Shadow Portfolio
52. REIT vs. Shadow Portfolio
53. International Evidence
54. REIT vs. RE Market Return Parameter on Real Estate Return
55. REIT vs. RE Market Return Parameter on Stock Market Return
56. REITs should have predicted the decline
57. REIT Summary REIT structure trades flexibility for tax savings Low correlation with other asset returns Worth a 5-10 percent asset allocation in a portfolio Locate in tax-advantaged account REITs provide only limited exposure to the underlying real estate markets!!!
58. Real Estate Investments Real Estate Risks Real Estate Investment Vehicles REIT CMBS
59. What a MBS Looks Like [Simplified] Rating Debt Service Master Servicer/Trust Bond Payments Special Servicer Investors(BondHolders) Mortgages Originator/Pooler Bond Proceeds Makes Loans
60. (Not Simplified!)
61. Structured Products - CDO Individual bonds or mortgages When a tranche gets fully repaid, money flows to the lower tranches
62. Structured Products – CDO2
63. Rating of Structured Products Mistakes multiply Modest imprecision in default risk estimates can result in large errors for a structured product Reduce diversifiable risk but increase systematic risk Holding more structured products does not help Tailor products to meet the minimum rating requirements No margin for error
64. Credit Default Swaps Real estate cannot be sold short Solution: securitize equity Solution: securitize debt CMBS cannot be sold short Solution: CDS No CDS reserve requirements Solution: require reserves against CDS
65. …. and then increased sharply Source: www.crenews.com
66. Historical CMBS Issuance
67. National CPPI Indices Source: Bloomberg
68. Historical CMBS Issuance plus CMBS Maturity – Exhibit 4 Maturity (# Loans), (Right Axis) Issuance Source: Commercial Mortgage Alert and Morningstar Maturity ($Mil)
69. How to Securitize Going Forward The power of markets to aggregate information Standardized and liquid instruments The ABX index declined in June, 2006, before defaults increased Transparent instruments and trade reporting requirements Everybody needs to have “skin in the game” Tie compensation to long-term performance Require sufficient equity at risk It’s all about INCENTIVES
70. Real Estate Investments Real Estate Risks Real Estate Investment Vehicles