1. Real Estate Investment Performance and Portfolio Considerations
Chapter 22
Real Estate Investment Performance and Portfolio
Considerations

2. Overview Real Estate Investment Returns Data
Real Estate Investment Performance
Holding Period Returns
Portfolios
Correlation
Efficient Frontier
Real Estate and Potential for Portfolio Diversification

3. Real Estate Investment Returns Data
Limited Data
Private, negotiated transactions
Asset is non-homogeneous
Thinly traded market
REIT Data
NAREIT
NCREIF Property Index

4. Real Estate Investment Returns Data – Continued

5. Real Estate Investment Returns Data – Continued

6. Cumulative Investment Returns

7. Real Estate Investment Performance
Holding Period Returns
PT = End of period price
PT-1 = Beginning of period price
D1 = Dividends

8. Real Estate Investment Performance – Continued
Example:
Purchase price $100
Sales price $110
Dividend received $5
HPR = $15/$100 = 15%
Geometric Mean Return – compound growth rate
Arithmetic Mean – simple average return
Consider the following annual returns:
15%, 20%, -30%, 22%
Arithmetic mean = ( )/4 = 9.25%
Geometric mean =[(1.25)(1.2)(0.7)(1.22)]0.25-1
Geometric mean = 6.39%

9. Holding Period Returns

10. Real Estate Investment Performance – Continued
Historical Comparisons
Risk
Business Risk
Default Risk
Liquidity Risk
Variability in asset returns & risk premiums
Coefficient of Variation
Risk per unit of return

11. Real Estate Investment Performance – Continued

12. Portfolios Portfolio Returns Example Portfolio Portfolio Return
Where W’s are weights
Example
Portfolio
Asset A: weight 30%, return 10%
Asset B: weight 40%, return 15%
Asset C: weight 30%, return 18%
Portfolio Return
(0.3x10)+(0.4x15)+(0.3x18)= 14.4%

13. Portfolios – Continued

14. Portfolios – Continued
Portfolio Risk
Standard deviation
Not a weighted average
There is interaction between returns of assets
Covariance
Absolute measure of how asset returns move together
Correlation
Relative measure of movement
Range of +1 to -1

15. Correlation

16. Correlation Matrix

17. Efficient Frontier

18. Efficient Frontier – 3 Assets (Stock, bonds, and NCREIF)

19. Real Estate and Potential for Portfolio Diversification
Portfolio Diversification with REITs and NCREIF
It looks like REITs may not provide diversification benefits due to positive correlation with stocks (~0.5)
Private real estate investments returns approximated by NCREIF provide greater potential for diversification
NAREIT returns are more volatile than that of NCREIF
This is because NCREIF index is appraisal based
NAREIT index returns reflect overall market fluctuations as well
NAREIT index may be a poor hedge against inflation compared to NCREIF

20. Diversification by Property Type

21. Diversification by Property Location