Edited by Susan Hudson-Wilson, CFA
and Charles H. Wurtzebach
Bibliographic record and links to related information available from the Library of Congress catalog
Introduction Susan Hudson-Wilson, CFA and Charles H. Wurtzebach
Chapter 1 Real Estate Markets: A Historical Perspective
Blake Eagle and Susan Hudson-Wilson, CFA 1
Introduction, 1
Pre-1975, 2
Inflation's Impact on Stock and Bond Investment Performance, 4
Congressional Passage of ERISA, 8
Real Estate Wealth, 9
Modem Portfolio Theory, 13
Performance Results, 15
Response to Inflation: 1980-1984,18
Public and Private Real Estate Syndications, 20
Savings and Loans, 23
Life Insurance Companies, 24
Foreign Investment, 26
Commercial Banks, 26
Real Estate Performance, 28
The Real Estate Capital Market: 1985-1989, 32
Public and Private Real Estate Syndication, 34
Savings and Loans, Bank, Life Insurance Companies, 35
Foreign Investment, 39
Real Estate and Inflation, 40
Outlook for the 1990s, 43
Today and Beyond, 45
Outlook for Pension Fund Investment in Real Estate, 47
Chapter 2 Commercial and Multifamily Real Estate Investment
Mark P. Snyderman, CAFE 50
Introduction, 50
Overall Market Size, 51
Free and Clear Equity, 53
Market Size, 54
Cash Flow, 54
Liquidity, 56
Valuation, 58
Risks, 59
Return, 62
Control, 62
Leveraged Equity, 63
Market Size, 65
Cash Flow, 65
Liquidity, 66
Valuation, 66
Risks, 68
Return, 68
Control, 69
Options, 70
Market Size, 71
Cash Flow, 71
Liquidity, 71
Valuation, 72
Risks, 72
Control, 73
Mortgages, 73
Market Size and Participants, 74
Cash Flow, 75
Liquidity, 76
Valuation. 79
Risks, 80
Return, 82
Control, 82
Hybrid Debt, 84
Market Size and Participants, 85
Cash Flow, 85
Liquidity, 85
Valuation, 86
Risks, 86
Return, 86
Control, 88
Senior Ground Leases, 88
Aggregation Vehicles, 89
REITS, 90
Market Size, 90
Liquidity, 91
Valuation, 91
Risks, 92
Return, 92
Control, 92
Partnerships, 93
Market Size, 93
Corporations, 94
Government Agencies, 95
Concluding Thoughts, 96
Chapter 3Real Estate in the Multiasset Portfolio
Mark Coleman, Susan Hudson-Wilson, CFA, and James R.
Webb 98
Introduction, 98
The Characteristics and Data of Commercial Real Estate, 1 00
Market Characteristics, I 00
The Data, 103
Real Estate in the Multiasset Portfolio, 107
Real Estate as an Inflation Hedge, 107
Reducing Portfolio Risk with Real Estate, 11 4
Real Estate and the Macro Economy, 1 1 7
Conclusion, 123
Chapter 4 Real Estate in a Capital Markets Context
S. Michael Giliberto and Sandon J. Goldberg 124
Introduction, 124
Risk and Return Basics, 126
The Interaction of Capital Markets Factors with Real Estate: The
Microview, 131
Real Estate Duration, 132
An Equilibrium Approach to the Space and Capital Markets: The
Macroview, 133
The 1970s and 1980s: A Case Study in Cyclical Extremes, 139
Summary and Conclusions, 142
Chapter 5 Real Estate Appraisal
Jeffrey D. Fisher 144
Why Is Property Appraised? 144
Market Value, 145
Investment Value versus Market Value, 146
Approaches to Measuring Value, 147
Cost Approach, 147
Sales Comparison Approach, 148
Income Approach, 151
Market-Derived Capitalization Rates, 152
Capitalization Rate Formulas, 153
Holding Period, 155
Valuation of a Leased Fee Estate, 156
Discounted Cash Flow, 158
Mortgage-Equity Capitalization, 161
Conclusions about Three Approaches to Measuring Value, 163
Chapter 6 Real Estate Portfolio Management 165
Part I Financial Theory Replaces Anecdote
Charles H. Wurtzebach 165
Introduction, 165
Private Market investment and Portfolio Strategy, 166
Traditional Real Estate Portfolio Management, 166
Strategy and Institutional Investor Participation, 168
Performance Targeting, 169
Strategy and Individual Investor Participation, 170
Strategy Execution, 170
Strategy and Risk-Return Relationships, 171
Applying Financial Theory of Real Estate Portfolios, 172
Principles, 173
Economic versus Geographic Location, 174
The Portfolio Construction Process, 175
Property-Type Diversification, 176
Defining Economic Location, 177
Portfolio Optimization, 179
Conclusion, 183
Part II What Saved PRISA? A Case Study
Charles R. Lightner 185
Introduction, 185
Background, 185
PRISA 1986,188
The Seeds of Solution, 189
The Prudential Portfolio Construction Process, 189
PRISA Diversification: Actual versus Target, 1987,191
Other Structural Considerations, 192
A Restructuring Driven by Property Sales, 194
A Quality Rating System, 195
Property-Type Attractiveness Indexes, 196
Procedural Changes, 197
The Search for the Perfect Sale, 197
Targeted Acquisitions, 198
Nowhere to Hide, 198
The Numbers Tell the Story, 199
The Results. 200
Afterword, 202
Appendix, 203
Part III"SampCo": A Hypothetical Portfolio Analysis
Susan Hudson-Wilson, CFA 207
Introduction, 207
Statement of SampCo's Portfolio Goals, 209
The Context 209
The Goal, 209
The Portfolio, 210
Location and Property Type, 21 0
The Dimensions of Diversification, 211
implications of and Relationships among the Dimensions of
Diversification, 221
Efficient Frontiers: Unconstrained and Constrained, 223
The Portfolio: Financial Structure, 228
The Portfolio Capitalization Graphs: Total, Controllable. and
Uncontrollable, 228
Portfolio Policy Implications and Recommendations, 230
Plans of Action, 230
Portfolio Transaction "Option A," 230
Portfolio Transaction "Option B," 231
Portfolio Transaction Option "C," 232
Summary and Conclusions 234
Chapter 7 Real Estate Investment Performance Measurement
Stephen E. Roulac 237
Introduction, 237
Differences between Real Estate and Corporate Securities, 240
Fundamentals, 242
Primary Considerations and Issues, 244
What Performance Should Be Measured? 249
Performance Measurement Purposes, 250
Who Is Interested in Performance Measurement? 253
Sources of Investment Returns, 256
ring Investment Returns, 258
Free-and-Clear Return, 259
Payback Period, 261
Accounting Return, 261
Profitability Index, 262
Internal Rate of Return, 263
Adjusted Rate of Return, 265
Relevant Time Period, 266
Implementation of Performance Measurement, 270
Performance Attribution, 273
Considerations in Comparative Analysis, 275
Performance Indexes and Benchmarks, 279
Chapter 8 International Real Estate
Charles H. Wurtzebach and Andrew E. Baum 284
Introduction, 284
Rationale for Nondomestic Real Estate: U.S. Pension Plans, 285
Attractive Historical Absolute Total Returns, 286
Non-U.S. Office Vacancy Rates Had Been More Stable, 287
Global Real Estate Portfolio Diversification Opportunities, 289
Risks Associated with Non-U.S. Real Estate: U.S. Pension Plans.
294
Lack of Knowledge, 294
Political Risk, 294
Currency Risks, 295
Small-Scale Markets, 295
Rationale for Domestic Real Estate: U.K. Institutions, 296
Attractive Performance Compared with U.K. Stocks and Bonds,
297
U.K. Property Regarded as an Inflation Hedge, 297
Property Investment Allows Managers to Match Assets and
Liabilities, 298
Opportunity to Outperform Competing Fund Managers, 298
Property Represents a Major Asset Class, 298
Rationale for Nondomestic Real Estate: U.K. Institutions, 299
Attractive Historical Absolute Returns, 299
Property Risk, 300
Property Investment and Portfolio Diversification, 301
Advantages of Nondomestic Real Estate investment, 304
Lease Structures, 304
Vacancy,305
Marketing, 305
Taxation,305
Liquidity, 305
Lumpiness, 306
Information, 306
Transaction Costs, 307
Conclusion, 307
Bibliography
Index