1. Real Estate Investment Performance and Portfolio Considerations
CHAPTER 22
Real Estate Investment Performance and Portfolio Considerations

2. Real Estate Investment Performance
Limited Data
Private, negotiated transactions
Asset is non-homogeneous
Thinly traded market
REIT Data
NAREIT
NCREIF Property Index

3. Real Estate Investment Performance
Holding Period Returns
PT = End of period price
PT-1 = Beginning of period price
D1 = Dividends

4. Real Estate Investment Performance
Example 22-1:
Purchase price $100
Sales price $110
Dividend received $5
HPR = $15/$100 = 15%

5. Real Estate Investment Performance
Geometric Mean Return
Arithmetic Mean

6. Real Estate Investment Performance
Example 22-2
Consider the following annual returns:
15%, 20%, -30%, 22%
Arithmetic mean = ( )/4 = 9.25%
Geometric mean =[(1.25)(1.2)(.7)(1.22)].25-1
Geometric mean = 6.39%

7. Real Estate Investment Performance
Historical Comparisons
Risk
Business Risk
Default Risk
Liquidity Risk
Variability in asset returns & risk premiums

8. Real Estate Investment Performance
Coefficient of Variation
Risk per unit of return
Portfolios
Asset efficiency
Portfolio Returns
Where W’s are weights

9. Real Estate Investment Performance
Example 22-3
Portfolio
Asset A: weight 30%, return 10%
Asset B: weight 40%, return 15%
Asset C: weight 30%, return 18%
Portfolio Return
(.3x10)+(.4x15)+(.3x18)= 14.4%

10. Real Estate Investment Performance
Portfolio Risk
Standard deviation
Not a weighted average
There is interaction between returns of assets
Covariance
Absolute measure of how asset returns move together

11. Real Estate Investment Performance
Correlation
Relative measure of movement
Range of +1 to -1

12. Real Estate Investment Performance
Portfolio Weighting
Efficient Frontier
Maximum return for risk level
Diversification & Real Estate
Historical Evidence
NCREIF Index & Appraisal Smoothing
Traded REITs & Public Markets Risk

13. Real Estate Investment Performance
Diversification
Property Type & Location
Global Diversification
Evolution of Global REIT Structures
CMBS Markets
International Indices

14. Real Estate Investment Performance
Diversification & Global Cities
Risks of Global Investment
Currency Risk
Incomplete Information
Different Tax Laws & Property Rights
Political Risk
Communication & Culture Differences

15. Real Estate Investment Performance
Derivatives
Long & Short Positions
Overexposure & Underexposure to Property Types