Andrew Baum and David Hartzell, Global Property Investment, 2011 Alpha and beta attribution in property investment

Andrew Baum and David Hartzell, Global Property Investment, 2011 The regression line residua l gradient of the line is b (beta ) a (alpha) Y X

Andrew Baum and David Hartzell, Global Property Investment, 2011 Meet alpha and beta Return Risk (beta) Security Market Line Return may simply be a reward for taking more risk – this is beta

Andrew Baum and David Hartzell, Global Property Investment, 2011 Meet alpha and beta Return Risk (beta) Security Market Line Return may be consistently higher without taking more risk – this is alpha Alpha

Andrew Baum and David Hartzell, Global Property Investment, 2011 Core Fully leased multi- tenant property Return: 8-10% Leverage: 0-30% Core-plus Stable lease roll Moderate NOI Upside Return: 11-14% Leverage: 30-50% Value-added Repositioning Moderate redevelopment Return: 16-19% Leverage: 60-65% Opportunistic Distressed sellers Development, significant redevelopment, financial engineering, emerging sectors Return: 20%+ Leverage: 65-75%+ Risk Return Alpha or beta?

Andrew Baum and David Hartzell, Global Property Investment, 2011 Alpha or beta? MarketAB Mean9.06%11.56%10.00% Std7.41% 15.70%

Andrew Baum and David Hartzell, Global Property Investment, 2011 It ’ s probably alpha

Andrew Baum and David Hartzell, Global Property Investment, 2011 It ’ s probably beta

Andrew Baum and David Hartzell, Global Property Investment, 2011 Which is best? Sharpe ratio: return / risk – Market: 9.06%/7.41% = 1.22 – Fund A: 11.56%/7.41% = 1.56 – Fund B: 10.00%/15.70% = 0.64 Information ratio: excess return / tracking error – Market: no tracking error, infinite information ratio – Fund A: no tracking error, infinite information ratio – Fund B: 0.94%/11.47% = 0.08

Andrew Baum and David Hartzell, Global Property Investment, 2011 What is alpha? Sub-market selection – geography: country/region – sector Transaction and development skills Asset management expertise

Andrew Baum and David Hartzell, Global Property Investment, 2011 What is beta? Leverage Vacant buildings Developments

Andrew Baum and David Hartzell, Global Property Investment, 2011 Alpha and beta in property investment Alpha and beta originate from structure and stock selection Stock alpha –Cost control, leasing, asset enhancement, acquisitions, dispositions –Asset management and transaction skills Structure alpha –Higher than benchmark allocations to outperforming markets and sectors –Risk classes constant Stock beta –Continuum from ground rents to speculative developments Structure beta –More volatile sectors, higher risk geographies

Andrew Baum and David Hartzell, Global Property Investment, 2011 Cash flow based stock level attribution Geltner investigates the stock selection effect in more detail Measures impact of these activities by isolating cash flows –Acquisition initial yield –Cash flow change –Yield shift

Andrew Baum and David Hartzell, Global Property Investment, 2011 Performance attribution framework for property funds Attribution of `excess’ IRR of a property fund Fund structure: almost entirely the impact of leverage; fees will limit this –Beta Timing: return impact of fund capital movements –Manager timing skill is reflected in this and is a source of alpha

Andrew Baum and David Hartzell, Global Property Investment, 2011 Example: fund cash flows Closed-ended UK wide mandate but segment focussed: 4/12 UK segments –55% in one of these £99mn GAV / £26mn equity –65-70% LTV 22 assets £4.5m average lot size 2.5 year average hold period –Transaction skills –Capital distributed back quickly Delivered a 31% net IRR to investors –But what was behind this?

Andrew Baum and David Hartzell, Global Property Investment, 2011 Case study: attribution year Property lLevel Property TWR 12.6%10.5%23.7%25.5%8.8%16.0% Benchmark TWR 9.2%10.5%17.4%19.1%18.5%14.9% Relative 3.1%0.0%5.4% -8.2%1.0% Structure -3.3%-3.7%-3.2%0.8%-0.2%-1.9% Selection (2 Comp) 6.1%3.4%8.4%4.7%-8.0%2.8% Selection (3 Comp) -6.3%-7.0%-2.9%-11.5%-13.8%-8.4% Interaction 12.4%10.4%11.3%16.2%5.8%11.2% Fund Level Gross TWR 15.7%20.1%73.1%52.3%5.1%31.0% Net TWR 11.8%16.7%57.6%40.1%8.7%25.6% IM Fee Reduction (%) 25.0%17.1%21.1%23.3%-70.1%17.2% Net Fund Structure -0.8%6.2%34.0%14.6%-0.1%9.7% Net Fund MWR 29.9% Timing 4.3%

Andrew Baum and David Hartzell, Global Property Investment, 2011 Risk adjusted performance attribution AlphaBeta Coefficient t-statistics R-Squared0.18 No Obs20 Fund CAPM Net Fund TWRs vs Benchmark Total returns: Fund 25.6% v benchmark 14.9% Annualized SD: 23.0% v benchmark 5.3% CAPM not statistically robust, but we have insight into the drivers of fund returns: –High beta – leverage, structure, asset level risk, short investment horizon –No evidence of alpha - but manager has been paid performance fees

Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions Defined sources of alpha and beta in direct property and indirect property investment Huge growth in unlisted property funds seen in recent times Performance attribution framework for indirect funds –Need to consider fund structure which we believe is beta –Need to consider cash flow timing Illustrative case study –At the direct property level the fund outperformed through segment specialisation –No evidence that it outperformed on a risk adjusted basis though – high beta –Were performance fees deserved? Practical limitations –Data hungry analysis and the required information is not always available –Credibility of benchmarks