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Diversified Investment in Listed Real Estate – A Competitive Analysis of REIT-Funds, Index-Certificates and Exchange-Traded Funds based on Transaction.

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Presentation on theme: "Diversified Investment in Listed Real Estate – A Competitive Analysis of REIT-Funds, Index-Certificates and Exchange-Traded Funds based on Transaction."— Presentation transcript:

1 Diversified Investment in Listed Real Estate – A Competitive Analysis of REIT-Funds, Index-Certificates and Exchange-Traded Funds based on Transaction Cost Theory Doctoral Session ERES Conference 2009, Stockholm Patrick Schlump Stockholm, June 24, 2009 Advisors: Prof. Dr. Karl-Werner Schulte, Prof. Dr. Klaus Röder

2 June 24, 20092Doctoral Session 1 1 Introduction 2 2 Theoretical Foundation and Fundamentals 4 4 Summary 3 3 Analysis and Study Setup Discussion 5 5 Structure of the Presentation

3 Listed real estate as part of a mixed-asset portfolio Introduction Problem Description 1 June 24, 20093Doctoral Session Listed real estate constitutes a separate asset class than non-listed real estate Variety of products available to implement strategy Active vs. passive problem arises for diversified products Stocks Bonds Real Estate Cash Other REITs non-Listed Listed Real Estate Companies Collective Investment Schemes Passive Active Exchange- traded Funds Index- Certificates (Index Funds) Exchange- traded Funds Index- Certificates (Index Funds) REIT-Funds Dilemma of product choice

4 Investment objectives for direct real estate are assumed to apply for listed real estate as well Introduction Problem Description 1 June 24, 20094Doctoral Session Prestige Enhancement Exploitation of Tax Advantages Rate of Return Diversification Accumulate Undisclosed Reserves Liquidity Owner-Occupation Maintanance of Capital Common Welfare Enhancement Safety Manageability of Investment Primary Objectives Secondary Objectives Real Estate Investment Objectives Hierarchy of objects may vary across investors Increased cost awareness among (private) investors More transparency requirements because of Mifid

5 The aim of the analysis is to explore which diversified product in listed real estate provides the best outcome from a private investor‘s view in terms of transaction costs Introduction Purpose of the Study 1 Risk-adjusted Performance June 24, 20095Doctoral Session Overview of the selected product types History Legal Structure Risks/ Chances Trading Transaction Cost Theory Life Cycle Cost Model Product Type Efficiency Identification of most efficient vehicle + Established stock market products Real estate market Diversified products for listed real estate Listed real estate products act in “parallel” worlds:

6 Within real estate stock markets less information efficiency than within general stock markets is assumed Theoretical Foundation Efficient Market Hypothesis 2 No outperformance for actively managed products in efficient markets in the long run Passive strategies are “cheaper” to implement Passive products such as ETFs and Index-Certificates are superior to mutual funds June 24, 20096Doctoral Session General stock market Listed real estate market Findings on market efficiency of listed real estate are ambiguous REIT markets are becoming more efficient Differences among countries evident Active management might generate excess returns in listed real estate markets

7 Applied measures of costs neglect significant factors Theoretical Foundation Transaction Cost Theory 2 June 24, 20097Doctoral Session Transaction cost theory traditionally analyses make-vs.-buy decisions, i.e. vertical integration Theory can be applied to various other scenarios Disclosure of TER (Total Expense Ratio) as an indicator of charges Initial charges and implicit costs are not covered by TER “The shortest route to the top quartile in performance is to be in the bottom quartile of expenses.” (Bogle 2000) Explicit Bid-Ask Spread Market Impact Operational Opportunity Costs Market Timing Opportunity Costs Missed Trade Opportunity Costs Bid-Ask Spread Market Impact Operational Opportunity Costs Market Timing Opportunity Costs Missed Trade Opportunity Costs Brokerage Commissions Market Fees Clearing and Settlement Costs Taxes/Stamp Duties Brokerage Commissions Market Fees Clearing and Settlement Costs Taxes/Stamp Duties Implicit TER components: Management fees, Custodian bank fees, Audit fees, Disclosure costs

8 Analysis and Study Setup Lifecycle Transaction Costs 3 June 24, 20098Doctoral Session Ex-ante Ex-post Initiation Costs Bargaining Costs Clearing & Settlement Costs Adjustment Costs Monitoring Costs Exit Costs Identification of instrument Identification of trading place Identification of trading partner Information/Searc h costs Determination of investment strategy Price negotiation Commissions and fees Load fees Market impact Bid/Ask spread Commissions Purchase fees Exchange fees Trading costs Taxes Transaction costs, Rebalancing costs Management fees Account fees Administrative expenses Distribution/Marke ting fees Legal expenses Back-end load fees Redemption fees Market impact Taxes Source: Own illustration following Picot (1982). Explicit/Implicit Most transaction costs within an investment lifecycle are implicit and not visible to an investor

9 A generic comparison shows the differences of the product types Product Type Efficiency 3 June 24, 20099Doctoral Session Analysis and Study Setup CriterionETFsIndex- CertificatesREIT-Funds DiversificationHigh Yes Tracking errorLow Yes, on purpose Dividend participation YesDepends on indexYes Trading costsCommissions and fees Sales load Management feeYesYes/noYes Price findingContinuously Daily LiquidityVery high Daily redemption Counterparty riskNo, except for swap-based YesNo Trading platformStock exchange/ OTC/Issuer Stock exchange/OTC Issuer

10 Diversification as a criterion for market efficiency Analysis and Study Setup Product Type Efficiency 3 June 24, Doctoral Session Property-Investor Property-Trader Property-Developer International National Regional/Local Commercial Special Use Residential Operational Diversification Geograph. Diversification Sectoral Diversification Asset Class Level Product Type Level Product Level General diversification benefits of listed real estate Source: Own illustration following Nowak (2005). Regulatory provisions, affecting diversification

11 Risk Management Efficiency Trading Efficiency Round trip costs: Exit costs: Fees and expenses: Round trip costs: Exit costs: Fees and expenses: Market Efficiency Further Efficiency Criterions need to be analyzed Product Type Efficiency 3 June 24, Doctoral Session Analysis and Study Setup Diversification: Analysis and comparison of different levels of diversification Transparency: Ability to observe current and recent levels of market activity and price formation Flexibility and Accessibility: Extent to which investors can use the product Diversification: Analysis and comparison of different levels of diversification Transparency: Ability to observe current and recent levels of market activity and price formation Flexibility and Accessibility: Extent to which investors can use the product Pricing Efficiency Benchmarking: General ability and process to mirror an underlying Dividend policies: Methods and consequences of dividend handling Tracking error: Analysis of deviation from a defined underlying Benchmarking: General ability and process to mirror an underlying Dividend policies: Methods and consequences of dividend handling Tracking error: Analysis of deviation from a defined underlying Liquidity: Comparison of liquidity provisions offered by the respective product types Price finding: Degree of replicating the underlying best Product costs: Comparison of costs associated with the set-up and running of the legal construct Liquidity: Comparison of liquidity provisions offered by the respective product types Price finding: Degree of replicating the underlying best Product costs: Comparison of costs associated with the set-up and running of the legal construct Analysis of costs

12 Lifecycle transaction costs and market efficiency are crucial parts of a comprehensive analysis of diversified products for listed real estate 4 June 24, Doctoral Session Summary  Listed real estate contributes to a mixed-asset portfolio (assumption based on Literature Review)  In efficient markets passive products are generally superior to actively managed products (assumption based on Literature Review)  Listed real estate markets are less efficient than the general stock market (assumption based on Literature Review)  Regulatory provisions and product features result in different lifecycle transaction costs and efficiency levels (qualitative and quantitative analysis/case study analysis) ETFs, Index-Certificates and REIT-Funds are not equally well suited for diversified investment in listed real estate

13 Discussion


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