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difference between ex ante and post ante returns

Ex Post Returns = historic returns used to measure past performance.
Ex Ante Returns = forecast returns used to make investment decisions.


2 types of return measures

Holding Period or Periodic Return
Multi-period Return


what is holding period return

The actual total return earned during the period the asset was held.
Total holding period return (HPR) for real estate consists of two components:
Capital Appreciation
Change in property value
Can be negative
Net rental income
Can be negative


iii) Why is there a difference in the returns calculated?

Geometric mean return captures the relationship between each return. Arithmetic mean return calculation does not. Arithmetic return assumes the returns are all independent of each other.
Another way of looking at it is, if you lose 100% of your capital in one year, you don't have any hope of making a return on it during the next year. Therefore investment returns are not independent of each other, so we should use geometric average to calculate the return.


Advantage IRR over TWRR

With IRR a return can be calculated without having to know the capital value of the investment at intermediate points in time. TWRR needs this information!
More convenient for real estate investments where reappraisal may not be frequent, and can capture timing of returns.
IRR measures the return an investment is generating given the initial outlay
Alternatively: IRR is the discount rate applied to all future cash flows, that when added up exactly equal the initial outlay, i.e. where NPV = 0


disadvantages of irr

Can be difficult to calculate (need excel or financial calculator)
Has difficulties if cash-flows change from positive to negative to positive during the project life


what is the profability index

Used as a measure of the return that takes into account scale of the investment (initial outlay)
Ratio of the present value of the future cash-flows to the initial outlay
Also called “benefit-cost ratio”


difference between real and nominal returns

Inflation – loss of purchasing power over time.
When comparing returns there may be times we need to be looking at REAL returns (adjusted for inflation), rather than NOMINAL (current dollar) returns.

Returns usually quoted nominally (including inflation).


explain capatalisation of revisionary income streams

Applying a straight cap rate can be unreliable when there are differences between passing & market rents
To account for this we capitalise the income with reversions
Reversions = changes in rental income that are expected when the current lease(s) permit
This is achieved by capitalising the passing rent until the next market review and then capitalised todays market rent from the next review.


explain ranking of investments

Both NPV and IRR give the same accept/reject decision
However, sometimes they may give conflicting rankings when considering mutually exclusive investments or there is capital rationing
If the investments are of similar risk, 2 factors to consider:
Objectives of the investor (e.g. investment timeframe)
Other uses of the investor’s money

It is a ratio measure, calculating the returns in proportion to the initial outlay.
Works on assumption smaller outlay project can earn the same IRR
In this example, E is preferred over C due to higher PI


sources of risk

1. market risk = Drop in demand
Unexpected inflation

2. financial risk = Interest rates
Renewal terms

3 property risk = location, tennants, building

Ratios can give us insight into the performance of property investments.
Enable comparisons with similar (benchmark) properties or historical performance of the actual property


what is WALE

A major property risk is tenants may not renew their leases
WALE is a risk measure for a multi-tenanted property or a portfolio of portfolios
It gives us a weighted average of the time remaining of all the leases
Longer WALE = lower risk


what is a sensitivity analysis

Considers the effect of changing one variable at a time
Aims at checking how sensitive the decision measure (IRR & NPV) is to changes in key assumptions
Helps understand how sensitive investment NPV is to changes in a particular key variable.
It is a technique used to determine the impact that changes in a certain variable have on the bottom line, i.e. NPV
Sensitivity analysis answers questions such as:
What impact does a 1% increase in loan interest rates have on NPV?
What impact does a 2% increase in rent have on NPV


2 probablity distribution approaches

Discrete distributions
Distributions based on past data


explain discrete returns

Here we consider a range of possible values and then estimate the probability of 3 to 6 values in that range
E.G. We might set the range for loan interest rates to fall between 5% and 11%. We can then assign a probability of occurrence at say 5%, 7%, 9% and 11% (every two % points)
Assigning the probability is subjective and thus is reliant on intuition and experience from past occurrences


what is the sharpe ratio

The Sharpe ratio is a risk-adjusted measure of return that is often used to evaluate the performance of an investment.
The ratio helps to compare the performance of one investment against another by making an adjustment for risk.
The higher the Sharpe ratio is, the more return the investor is getting per unit of risk

list formula variables


what is downside risk

Investors are more concerned about failing to earn their expected return than they are about earning above their target return
Standard deviation (& variance) as a measure of risk gives equal importance to the outcomes above or below the expected mean
Semi-variance (& semi-deviation)
considers only the unfavorable variations
below the average (or benchmark return