Real Assets Flashcards
Real Estate Indices
NCREIF Property Index (NPI), value weighted, quarterly appraisal based. Collect data from investors. Is unleveraged.
Appraisal based sales approach
Comparable sales approach - values property regarding comparable assets in area to value property.
Cost approach, income approach are the others.
Transaction based index - reported prices, RSM
RSM, repeat sales method. Observation period of min two reported transactions. Properties that turn over more frequently are over represented.
RSM ADVANTAGE - detailed property characteristics not required as its calculated based on sales of the same property, robust to specification error.
RAM DISADVANTAGE - small sample size, assumption property attributes are static and don’t change, new transactions force backward adjustment to the historical returns.
Transaction based index - HPM, hedonic pricing method
Observed transaction/actual data of some property and characteristics of others. Assumes each property attribute had its own market.
ADVANTAGES: uses all observations- not just repeat sales, flexible as can be adapted for environment and market, avoids backward adjustments, allows analysis of property attributes, can be used to estimate marginal contribution to property equilibrium prices or certain attributes.
DISADVANTAGES: requires large data set, could have sample selection bias, exposed to specification error, assumes knowledge of positive and negative externalities, econometric problem (multicollinearity) May arise.
Major indices
US standard and poors case shiller home price index: housing and residential using repeat sales method. Transaction based.
TBI developed by MIT - Transaction based. Uses Hedonic Pricing Method
Uk FTSE commercial property index - appraisal.
NPI index, appraisal based. US commercial property.
REITs - market based, not appraisal based.
Agricultural assets - 4 functions improve efficiency
Location - transport improves effectiveness
Time - storage allows quick delivery
Quality - blending, grading, processing
Input allocation and delivery - irrigation
Currency moves
Eg. US investor buys euro property.
Valued in EUR. If currency risk not hedged, and Euro appreciates, then add appreciation to dollar income.
5% cash flow. EUR appreciates 3%. Return is 8%.
Films - slate financing
Equity financing from hedge funds or investment banks for film production.
Project finance
Not same as Public Private Partnership, PPP.
Loans are usually non recourse - are protected by project assets.
Discounted Cash Flow analysis
DISADVANTAGES: subject to estimates of expenses, errors in occupancy and estimates of lease growth rates.
Greenfield/Brownfield
Greenfield - design, under construction, higher risk.
Brownfield - starts when assets are constructed. Good visibility to revenue, operating costs, usage rates.
Arbitrage
Hard with closed end mutual funds - positions are only know at quarter end.
Stock Market Based Property Return Indices
Stocks that’s focus on commercial property - eg, commercial property REITS. Are not leveraged.
REITS
Mortgage REITS exhibited largest drawdown in 2008, -69%.
Higher return than stocks and bonds but higher risk.
Market valued.
