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Summary Investment Management: Property
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- Stellenbosch University (SUN)
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INVESTMENT MANAGEMENT 348PROPERTY
Emile Terblanche & George F. Fourie
Luschke Labuschagne
TOPIC 1:
Chapter 7 (1): Real Estate as an Investment
Why do we need to learn about property investments?
Equity
Bonds
Cash
Alternatives
o Fx/Cryptos
o Commodities
o Hedge funds
o Infrastructure
o Private equity
o Property
Commercial (shops or office block)
Residential (living quarters)
Gain exposure to property through:
o Direct investment. (buy the physical asset)
Single investment (not well diversified location and
type)
Liquid (high transaction cost)
Funds locked in for long term.
Lack of expertise (e.g., outside of residential property)
Very capital intensive.
o Listed instrument (REIT (Real Estate Investment Trusts), MBS)
Same risk and return as direct levered investment.
Diversified portfolio of properties.
Liquid (trades on stock market)
Specialized expertise in property investing.
Active property management of property portfolio.
Stock market return component (trade at a premium of
discount to NAV based on investor’s view of
management.
, Property doesn’t move in the same direction as other assets. Less risky (theoretically)
7.1 Investment Industry, and Real Estate’s Role Therein
7.1.1 Investors’ goals/objectives and concerns
Investors buy and sell capital assets thereby making up both the demand and supply side of the
capital markets.
Investors differ in terms of investment horizon, risk preference and return expectations.
Some investors prefer more risk – higher return.
Property gives you the best of both objectives.
Objectives:
o Growth (savings) – long term investment with no immediate need for cash flow. (E.g.,
Dividends)
Long-term investment with cash payment when sold.
If income is however generated from this investment, it is plowed back into the
investment to maximize the growth of the accumulated capital over the
investment time horizon.
Income invested back into the property to maximize capital growth.
Typically younger, middle-aged individuals & institutions where cash inflow >
cash outflow.
More for younger investors.
o Income (cash flow) – investment must consistently generate cash. (E.g., Bonds in form of
coupons)
Consider initial cash investment as well as potential changes in the cash flow
over time.
Prefer high cash payout rate, for example dividends or net rental.
Typically, retired individuals or institutions with a larger number of retired
members opposed to contributing members.
More for older investors.
Constraints for real estate investors: (NB)
o Risk:
The possibility that future investment performance may vary over time in a
manner that is not entirely predictable at the time when the investment is
made.
Future investment performance not predictable.
All things being equal, investors will prefer less risk (uncertainty)
Surrounding areas play a role in the risk of the property. (Location)
Investors always prefer less risk.
o Liquidity:
The ability to sell and buy investment assets quickly at full value and without
much affecting the price of the assets.
Can sell and buy the investment quickly at full value.
Investors prefer liquidity.
Property assets take time to sell.
, Listed real estate investments more liquid relative to direct commercial real
estate investments.
Physical property markets cyclical (extended periods with less liquidity)
Much less liquid than shares. If I sell a share now, in a few days the money is in
my bank, but with property it takes much longer.
Investors are willing to pay more for a liquid asset. Gives flexibility to move
capital in or out of the investment and to respond to news and perceived
opportunities. (major constraint in real estate)
o Investment horizon:
The future time over which the investor’s objectives, constraints, and concerns
are relevant.
Relevant period for the investor’s goals and concerns.
Investment horizon affects risk and liquidity preferences.
Not for short term investors or impatient investors.
Affects their ability to bear risk and their need to liquidity or tolerance thereof.
o Investor expertise and investment management.
How much knowledge, ability, and desire the investor has to manage the
investment process and the investment assets.
Specialized property knowledge and management expertise needed, especially
for listed property portfolios (REITs).
Differs between commercial and residential.
o Investor size (amount to be invested)
How ‘big’ the investor is in terms of the amount of capital in need of investment.
Larger investors may have the benefit of economies of scale and are able to
afford more investment alternatives.
Can employ professional property managers.
10% deposit and 5/6% for transaction fees that needs to be put down from your
own equity to buy property (flat of R2 mil)
Larger investors may have less liquidity, as the weight of their capital may tend
to influence asset prices when they move it around.
o Capital constraint:
Whether the investor faces an absolute constraint on the amount of capital he
or she has available to invest, or can obtain additional capital relatively easily if
good investment opportunities are available (e.g., from stockholders or
depositors).
Funds available (or access to funds) to be able to invest in good investment
opportunities.
7.1.2 Implications of Investor heterogeneity
Heterogeneous = they have different personal goals and lifestyles, they are at different points in
their life cycles, and they have different amounts of wealth and earned income.
Investors differ in terms of objectives, lifestyle, life cycle, income and wealth.
Majority investment decisions made by institutional investors (for example banks, pensions and
investment management funds).
, Institutional investors are also heterogeneous – different expertise, liabilities, regulations and
constraints.
Heterogeneity creates market liquidity.
One has what the other wants and that makes the market function.
Lays the foundation for a market in investment products. Different products can be tailored to
different objectives and constraints, and heterogeneity means that some investors will want to
buy when other investors want to sell, thereby creating liquidity in the asset market place.
Real estate investment system.
Underlying assets – commercial property investments of a real estate investment trust (REITs)
for example. (Invest in commercial properties (shops and buildings that is not used for living
space))
o Refers to the directly productive physical capital, such as an office building or an
industrial or service corporation.
Actively managing the portfolio that you are investing in (you get liquidity, don’t need to finance
the entire building yourself, but invest in the portfolio)
Investment product can be “removed” from the underlying asset but are based on and may have
claims on the underlying asset.
For example, an investor buys REIT shares. The investor does not directly own the property in
the REIT portfolio, but the REIT share performance is based on the performance of the
underlying property portfolio.
Exhibit 7.2:
o Institutional and wealthy investors can own the underlying property directly
(commercial property can be very expensive).
o Passive investors may not have the time, expertise and resources for purchasing and
managing direct real estate investments. For example, the investor buys real estate to
diversify their portfolio of stocks and bonds.
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