Course JEM 132: Real Estate Investment

Transcription

1 Course JEM 132: Real Estate Investment Lecture 1: Introduction and Case Study Preview 2 October 2017 Tomáš Jandík, CFA, MRICS PhDr. Pavel Streblov MSc

2 Who are we...? Tomáš Jandík Pavel Streblov Chief Investment Officer at REICO MSc in Real Estate (Reading, UK) MA in Economics and Management (Berlin) Member of the Royal Institution of Chartered Surveyors (MRICS) Holder of the CFA charter and a member of the Czech CFA society Mailto: tomas.jandik@reicofunds.cz Mobile: Business Director at Penta Investments MSc in Political Economy, London School of Economics and Political Science MSc in Real Estate (Reading, UK) PhDr in Economics, IES FSV UK Member of the Royal Institution of Chartered Surveyors (MRICS) Mailto: streblov@pentainvestments.com Mobile: October Page 2

3 Real Estate Investment- Deliverables Lectures 1 & 2 Lectures 3-6 Lectures 7-10 Understand economic forces driving supply and demand of real estate Determine market value of commercial property Execute real estate investment Typical Professions: Researcher - Real Estate Economist Valuer Investment Analyst Acquisition Manager Lectures 11 & 12 Determine optimal size and asset selection of a real estate investment portfolio Midterm & Final Exam Fund Manager Page 3

4 Course Contents Overview of Planned Lectures Economics of Real Estate Introduction and Case Study Preview Real Estate Economics Property Valuation Overview of Property Valuation Methods Traditional Valuation Methods Discounted Cash Flow and Internal Rate of Return Property Development and Land Residual Valuation Real Estate Investment Pre-Acquisition Investment Analysis in Real Estate Acquisition Due Diligence Process and Underwriting Debt Capital Markets and Real Estate Derivatives Equity Capital Markets and Real Estate Financing Structures Real Estate Portfolio Management Introduction to Real Estate Portfolio Management Risk Analysis and Property Portfolios Lecturer TJ PS TJ TJ TJ PS PS PS PS PS TJ TJ Page 4

5 Section A Real Estate Economics Economics of Real Estate - Preview : Commercial real estate as a distinct product Differentiation of real estate sub-markets and market players Basic forces driving the supply and demand in real estate markets Marginal revenue product and the theory of derived demand Real estate development and new supply Theories of economic growth of regions and urban areas Causes and consequences of cycles in the real property market Economic inefficiencies and imperfections of real property market Page 5

6 Section B Property Valuation Trivial Example: Your property earns 1 mil p.a. Another property earning 2 mil. p.a. was recently sold for 20 mil. => What is the market value of your property? Complications: Rent Office, retail, industrial or residential Property is under/over rented Expiry void - uncertainty upon lease-end Different covenant strengths of comps CAPEX uplifts and (re)development Price, value or worth? IRR vs. Yield. Different methods, different results Unique circumstances (e.g. leverage) Yield Value Page 6

7 Section C Real Estate Investment Real Estate Investment - Preview Analytical tools for assessment of real estate investment Impact of leverage on equity risk and return Basic steps in commercial, legal and technical due diligence process Acquisition underwriting process, structuring of real estate transactions Sources, conditions and cost of debt and mezzanine financing Equity sources and structures Real estate derivatives and derivative markets Investor profiles and the risk/return appetite Page 7

8 Section D Real Estate Portfolio Management Portfolio Management - Preview IPD: Decomposition and measurement of property returns: capital gain vs. income return. Diversification and systematic vs. specific risk of property portfolios Sharpe ratio as the trade-off between risk and return. CAPM beta as a measure of systematic (market) risk. Diversification across sectors and countries, and optimal number of properties in a portfolio Application of Monte Carlo simulation: NPV analysis and property development Markowitz: Source: IPD 2011 Slope = Sharpe ratio Page 8

9 Course Requirements Course Requirement Mid Term Case Study Final Exam Activity Oral Exam Total Grade A B C Fail Performance (%) Description 10 multiple choice questions/ 1.5 points each Investment proposal up to 2,000 words, see special instructions below 10 multiple 2 points each + structured essay questions (30 points) Activity and quality of questions and comments during lectures Justification of case study + course reflection during final discussion Both, total and partial minimum pass rates must be met. Maximum Points Minimum Required Pass Rate Page 9 0 participation required

10 Course Literature Study Materials: Real Estate Investment, A Capital Market Approach, Gerald R. Brown, George A. Matysiak Real Estate Finance & Investments, William Brueggeman and Jeffrey Fisher Required sections and/or research papers will be announced after every lecture Lecture slides and attendance will provide you with enough material for passing the course. Page 10

11 Case Study Preview Standing Assets (Re)developmet Goal: prepare an investment proposal that meets the below investment requirements; Standing assets: income producing office, retail, industrial or hotel assets, income producing residential investment will not be considered. Investment requirements: value add or opportunistic investment, minimum geared IRR 15%, holding period 5-years, equity multiple of at least 1.75x over 5 year holding period. Development projects: land or redevelopment opportunities suitable for office, retail, industrial, no residential (re)development Investment requirements: minimum geared IRR 20%, holding period of up to 5-years, no dividends paid during holding period but an equity multiple of over 2.0x over 5 years is required. Proposed report structure: Executive Summary; Location Description; Property/ Project Description; Market Overview; Business Plan; Project Financing; Recommended Pricing; Investment Performance; Conclusion Required format: investment proposal in pdf (max 2,000 words + appendices), brief presentation in ppt, accompanying calculations in xls = 3 documents required. Page 11

12 Lecture 1 Learning Outcome Statements Key Course Task: Case Study: Prepare investment proposal for investment into a standing asset or a (re)development project given specific investor requirements. Learning Outcome Statements: LOS 1.1: Compare real estate investment to other asset classes such as equity and fixed income. Detail and discuss specific features of real estate as an investment class. LOS 1.2: Differentiate investment market from occupiers markets. Differentiate residential and commercial real estate. Introduce office, retail, industrial and leisure real estate markets. Page 12

13 What is Real Estate? Definition Real estate property is land and anything permanently attached to it, under and above it, including natural resources and any technical improvements such as buildings and other constructions. Freehold interest => opportunity costs of capital Leasehold interest => rent, ground rent Nature of property investment: Typically long- term in nature High transaction costs upon purchase and sale Long time to completion of a transaction Proof of ownership can be difficult Bulky investment with large capital outlay Good hedge against inflation (though conflicting research) Property can be used as collateral for securitization Premium on yield compared to bonds for disadvantages (inefficiencies exist) Page 13

14 Real Estate Submarkets (1/2) Residential (not subject of this course) Valuation influenced by population growth, income growth, location Investment moderately active, medium liquidity, high leverage, return from income and capital gain Risk before and during start up for new construction Ofice buildings: Valuation influenced by GDP growth, location, tenant mix Investment active, medium liquidity, high leverage, return from income and capital gain Risk before start up of new construction, compentition, obscolescence, location shifts Page 14

15 Real Estate Submarkets (2/2) Shopping Centers: Valuation influenced by community growth, population and income, location, tenant mix, lease terms Investment active, low liquidity, medium leverage, return from income and capital gain Risk involves establishing property tenant mix at the start up, vacancy rate, competition, obsolescence Warehouses: Valuation influenced by industrial activity, location, design for material handling change Investment passive, medium liquidity, medium leverage, return mainly from periodic income Risk involves oversupply, obsolescence with change in material handling procedures... Raw land, hotels, petrol stations, golf courses, etc. Page 15

16 Real Estate Markets Banks Investment Market Invest Exit Development Market Occupier Markets (Commercial) Residential Market Offices, Retail, Logistics, Leisure Residential Real Estate Page 16

17 Sq m ths. Vacancy rate in %, Prime rent in EUR/Sq m Occupier Markets Developers bring in new supply, landlords lease property Occupiers either acquire (owner occupation) or lease Motivation: accommodate corporate processes along value chain Leasing deals create occupier market (office, retail, industrial) Cumulative supply and take up meet and clear via market rent. Source: CBRE data, REICO analysis Czech Industrial Market Dynamics 20,0 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0, H (f) Completions Take-up Vacancy rate Prime rent Net absorption continuing positive net absorption and take up in excess of new supply has led to minimum vacancy rate for Czech industrial asset class Page 17

18 Investment volume in EUR mln. Prime yields in % Investment Market Investors make capital allocation decisions subject to their sectoral and regional preferences as well as their target lot size CEE Property Investment Volumes F Poland Czech Republic Hungary Slovakia Warsaw Prague Budapest Bratislava Source: Prague Research Forum, REICO analysis 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Poland traditionally most liquid market, Hungary coming back strong Page 18

19 Investment volume in EUR mln. Prime yields in % Investment Market Investors then buy the levered asset off an initial yield which reflects investor s minimum IRR requirements Prime Yield Development Czech Republic , H1 Residential Office Retail 2017 Industrial Mixed-Use Other Forecast 2017 Office Prime Yield Retail Prime Yield Source: CBRE data, REICO analysis 9,00 8,00 7,00 6,00 5,00 4,00 as yield compression continues, investment market is in better shape than before subprime mortgage crisis Page 19

20 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Yields v % Investment Market 10,00 9,00 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00-1, baz.b. German Government Bond vs. Prime Office Yields 60 baz. b. 550 baz. b. 6,90% 5,50% 3,50% despite prime yield levels approaching pre-crisis levels, there is a clear argument that real estate is far from overpriced Prague "Prime Office Yield" Munich "Prime Office Yield" Bratislava "Prime Office Yield" Czech Republic 10Y Bond Yield Germany 10Y Bond Yield Source: CBRE data, REICO analysis Page 20

21 Real Estate as an Asset Class Risk/Return characteristics of Real Estate: Benchmarking of real estate returns to other investment classes bonds/equities Build-up valuation method adds to bond yield various premia for liquidity risk, depreciation, obsolescence and other risk categories of property relative to bonds. Markowitz model frequent optimization framework to determine optimal real estate allocation in international diversified portfolios. Source: Clairon Partners (September 2011). Page 21

22 Real Estate as an Asset Class Heterogeneous investment opportunities => => Different investment strategies within the real estate sector possible Several real estate assets subsectors with different risk/return profiles Return Broad Investment Strategies 20+% 16-19% 11-14% 8-10% Core Fully leased multi-tenant property Core Plus Stable NOI with moderate upside Value Add Repositioning, releasing, redevelopment Opportunistic Distressed deals, development 0-30% Leverage 30-50% Leverage 50-65% Leverage 65+% Leverage Risk Page 22

23 Course Tips Attendance at lectures highly recommended Focus on selecting a good assignment topic, feel free to discuss with us When preparing for tests, broadly follow Learning Outcome Statements (LOS) Always ask yourself how is this concept applied in practice Contact us by ing both addresses each time: tomas.jandik@reicofunds.com AND streblov@pentainvestments.com Do not hesitate to ask any time Page 23