“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 21 Institutional Investment and REITs

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Major Topics  What is Institutional Investment?  The Players in the Institutional Investment Industry  What are REITs?  REIT regulation and earnings measures  Measures of Risk  Modern Portfolio Theory and the Role of Real Estate Equity

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Institutional Real Estate Investment  The total value of pension fund assets grew from around $500 Billion in 1980 to over $4.3 Trillion by 2001  Substantial growth of pension fund capital is expected to continue into the 21st century as the 75 million-strong "baby boom" generation hits its peak earning years and prepares for retirement

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Investing in Real Estate vs. Stocks and Bonds  Large lump sums are required to purchase a single real property asset  Property management and real estate asset management services are needed  Real Estate is Illiquid, and takes longer, and is more expensive (per dollar invested), to sell real property assets than to sell the financial securities

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Public and Private Asset Markets  Public asset markets refers to public exchanges such as the New York Stock Exchange, which provide easy and inexpensive access to all investors, large and small  Private asset markets refers to markets in which the individual capital assets are traded privately in "deals" negotiated between individual buyers and sellers

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Modes of Investing in Real Estate

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Industry Associations  PREA: The Pension Real Estate Association  NCREIF: The National Association of Real Estate Investment Fiduciaries  AIMR: The Association for Investment Management and Research  NAREIT: The National Association of Real Estate Investment Trusts  RERI: The Real Estate Research Institute

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner REITs  Real Estate Investment Trusts were created by Congress in 1960  a REIT is a company dedicated to owning and, in most cases, operating income- producing real estate, such as apartments, shopping centers, offices and warehouses  The main benefit of being a REIT: one level of taxation similar to a partnership  Main limitation of being a REIT: a restriction on earnings retained by the company

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner REIT Growth

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner REIT Ownership

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner How Do Institutional Investors View Risk in a Portfolio Context?  Total Risk  Systematic Risk  Beta Measures of Risk-Adjusted Returns

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Measures (Contd.)

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Portfolio Theory and the Role of Real Estate Equity  MPT is the modern, quantitative version of more traditional diversification rules of thumb  MPT suggests that real estate equity ought generally to be one of the major asset classes in the portfolio, along with stocks and bonds  MPT is also applied to institutional real estate investment

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Modern Portfolio Theory  The essential idea in MPT is to find combinations of investments (i.e., "portfolios") which will minimize the amount of portfolio risk (i.e., volatility across time) for a given target total return, or (equivalently) maximize the expected portfolio return for a given target maximum portfolio risk

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner MPT (Contd.)  The required informational inputs to solve this portfolio problem are, for each asset or class of assets to be considered in the portfolio:  Expected return  Volatility (standard deviation of return across time)  Correlation’s coefficients of the returns between each pair of assets (or asset classes)

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner MPT (Contd.)  Example: using a quadratic programming optimization technique  The portfolio mean is just the weighted average of the individual asset means:  The portfolio volatility is the square root of the portfolio variance

“Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner END