CAIA - 18 - International Real Estate Investments

Question 1

A number of issues exist with international real estate investing:

1. Lack of ___ knowledge
2. ___costs
3. ___restrictions on foreign ownership
4. Higher ___costs
5. Complex ___
6. ___-___markets
7. ___and ___risks
8. ___ ___risk
9. Lack of ___to local services

Answer 1

A number of issues exist with international real estate investing:

1. Lack of local knowledge
2. Agency costs
3. Regulatory restrictions on foreign ownership
4. Higher transaction costs
5. Complex taxation
6. Small-scale markets
7. Political and economic risks
8. Exchange rate risk
9. Lack of access to local services

Question 2

About ___% of the $33 trillion of commercial real estate in Europe, Asia-Pacific and North America is invested and ___% is investable. ___% is not investable.

Answer 2

About 37% of the $33 trillion of commercial real estate in Europe, Asia-Pacific and North America is invested and 26% is investable. 36% is not investable.

Question 3

___ costs are the total costs of buying and selling a residential property.

Answer 3

Roundtrip costs are the total costs of buying and selling a residential property.

Question 4

International real estate investing generates ___ expected returns than domestic real estate.

Answer 4

International real estate investing generates higher expected returns than domestic real estate.

Question 5

Real estate returns across regions have ___ correlations.

Answer 5

Real estate returns across regions have low correlations.

Question 6

In theory, hedging currency risk ___ the efficient frontier.

Answer 6

In theory, hedging currency risk enhances the efficient frontier.

Question 7

Real estate investing offers income taxation advantages to those in ___-income tax brackets.

Answer 7

Real estate investing offers income taxation advantages to those in high-income tax brackets.

Question 8

Accounting depreciation usually ___ true economic depreciation.

Answer 8

Accounting depreciation usually exceeds true economic depreciation.

Question 9

What is the present value of the depreciation tax shield (equation).

Answer 9

Question 10

Gains on real estate investments are taxed when they are ___.

Answer 10

Gains on real estate investments are taxed when they are sold.

Question 11

There are 3 key reasons why leverage is central to most real estate investing:

1. Leverage is used to increase ___ ___ ___
2. Leverage in foreign currency ___the debt
3. Leverage offers ___-___financing

Answer 11

There are 3 key reasons why leverage is central to most real estate investing:

1. Leverage is used to increase assets under management
2. Leverage in foreign currency hedges the debt
3. Leverage offers tax-deductible financing

Question 12

There are a number of challenges associated with international real estate investing:

1. ___ relationships
2. ___ ___
3. ___and ___ costs
4. ___ and ___risks
5. ___risks
6. ___ ___risks

Answer 12

There are a number of challenges associated with international real estate investing:

1. Agency relationships
2. Information asymmetries
3. Illiquidity and transaction costs
4. political and economic risks
5. legal risks
6. exchange rate risks

Question 13

Real estate portfolio managers, as agents of investments, serve two key functions:

1) as ___ of properties
2) as ___ ___in buying and selling properties.

Answer 13

Real estate portfolio managers, as agents of investments, serve two key functions:

1) as managers of properties
2) as decision makers in buying and selling properties.

Question 14

There are 3 reasons why agency relationships matter:

1. The market is ___
2. Investors cannot rely on ___ ___ to monitor and control managers
3. Good managers can consistently ___ ___ ___.

Answer 14

There are 3 reasons why agency relationships matter:

1. The market is inefficient
2. Investors cannot rely on other investors to monitor and control managers
3. Good managers can consistently generate abnormal returns.

Question 15

According to Geltner et al. (2014), the so-called free lunch is not free since foreign investors are exposed to ___ ___ and additional costs to ___ ___.

Answer 15

According to Geltner et al. (2014), the so-called free lunch is not free since foreign investors are exposed to information disadvantages and additional costs to obtain information.

Question 16

All else equal, domestic real estate investments ___ international real estate investments.

Answer 16

All else equal, domestic real estate investments outperform international real estate investments.

Question 17

Illiquidity is ___ severe for international real estate investments.

Answer 17

Illiquidity is more severe for international real estate investments.

Question 18

Political risk is ___ for real estate investments.

Answer 18

Political risk is significant for real estate investments.

Question 19

Government regulation is an example of ___ risk.

Answer 19

Government regulation is an example of economic risk.

Question 20

The risk that a title is encumbered or fraudulent is an example of ___ risk.

Answer 20

The risk that a title is encumbered or fraudulent is an example of legal risk.

Question 21

___ ___risk is the key short-term risk that foreign investors are exposed to.

Answer 21

Exchange rate risk is the key short-term risk that foreign investors are exposed to.

Question 22

___ ___are restrictions imposed on foreign investors’ capital that hinder or increase the cost of repatriation of international earnings. These risks are highest in ___markets.

Answer 22

Capital controls are restrictions imposed on foreign investors’ capital that hinder or increase the cost of repatriation of international earnings. These risks are highest in emerging markets.

Question 23

What is the variance of foreign property in terms of property and currency? (equation)

Answer 23

Question 24

In theory, investors can use two approaches to determine optimal portfolio weights for international real estate investments:

1. ___ ___ ___
2. ___ ___ ___

Answer 24

In theory, investors can use two approaches to determine optimal portfolio weights for international real estate investments:

1. Modern portfolio theory

2. International index weights

Question 25

Using ___ \_\_\_ \_\_\_leads to countries being over/under represented. This issue can be resolved by using \_\_\_adjustments.

Answer 25

Using **international index weights** leads to countries being over/under represented. This issue can be resolved by using **GDP** adjustments.

Question 26

A key drawback of investing in international REITs is that their ___ are ___ \_\_\_.

Answer 26

A key drawback of investing in international REITs is that their **returns** are **highly correlated**.

Question 27

There are 4 types of debt real estate investments: 1. First ___ \_\_\_ 2. ___ \_\_\_-\_\_\_securities 3. Real estate ___ \_\_\_ 4. ___ \_\_\_ of REITs

Answer 27

There are 4 types of debt real estate investments: 1. First **mortgage claims** 2. **Commercial mortgage**-**backed** securities 3. Real estate **mezzanine debt** 4. **Corporate debt** of REITs

Question 28

First claim mortgages are ___ liquid than REITs and have exposure to ___ \_\_\_ risk.

Answer 28

First claim mortgages are **less** liquid than REITs and have exposure to **interest rate** risk.

Question 29

The advantages of CMBS is that they are \_\_\_, \_\_\_-\_\_\_and have \_\_\_enhancements

Answer 29

The advantages of CMBS is that they are **liquid**, **well**-**diversified** and have **credit** enhancements

Question 30

The disadvantage to CMBS is that they are ___ \_\_\_.

Answer 30

The disadvantage to CMBS is that they are **less** **transparent**.

Question 31

The advantage of mezzanine real estate debt relative to other real estate strategies is that it has ___ \_\_\_. However, it is also ___ \_\_\_ and has ___ \_\_\_ \_\_\_.

Answer 31

The advantage of mezzanine real estate debt relative to other real estate strategies is that it has **higher returns**. However, it is also **less liquid** and has **more credit risk**.

Question 32

The advantage of corporate debt of REITs is that they are more \_\_\_. However, they have no ___ \_\_\_and have higher \_\_\_risk, ___ \_\_\_ risk and \_\_\_than other debt instruments.

Answer 32

The advantage of corporate debt of REITs is that they are more **liquid**. However, they have no **direct ownership** and have higher **credit** risk, **interest rate** risk and **volatility** than other debt instruments.