Real Estate Investment and Finance

The fully revised and updated version of the leading textbook on real estate investment, emphasising real estate cycles and the availability and flow of global capital

Real Estate Investment remains the most influential textbook on the subject, used in top-tier colleges and universities worldwide. Its unique, practical perspective on international real estate investment focusses on real-world techniques which measure, benchmark, forecast and manage property investments as an asset class. The text examines global property markets and real estate cycles, outlines market fundamentals and explains asset pricing and portfolio theory in the context of real estate.

In the years since the text's first publication, conditions in global real estate markets have changed considerably following the financial crisis of 2008-2009. Real estate asset prices have increased past pre-crisis levels, signalling a general market recovery. Previously scarce debt and equity capital is now abundant, while many institutions once averse to acquiring property are re-entering the markets. The latest edition - extensively revised and updated to address current market trends and practices as well as reflect feedback from instructors and students - features new content on real estate development, improved practical examples, expanded case studies and more. This seminal textbook:

• Emphasises practical solutions to real investing problems rather than complex theory
• Offers substantial new and revised content throughout the text
• Covers topics such as valuation, leasing, mortgages, real estate funds, underwriting and private and public equity real estate
• Features up-to-date sections on performance measurement, real estate debt markets and building and managing real estate portfolios
• Includes access to a re-designed companion website containing numerous problems and solutions, presentation slides and additional instructor and student resources

Written by internationally-recognised experts in capital management and institutional property investing strategies, Real Estate Investment, Second Edition: Strategies, Structures, Decisions is an indispensable textbook for instructors and students of real estate fund management, investment management and investment banking, as well as a valuable reference text for analysts, researchers, investment managers, investment bankers and asset managers.

Auteur

DAVID HARTZELL is Steven D. Bell and Leonard W. Wood Distinguished Professor of Finance and Real Estate and Director, Wood Center for Real Estate Studies, University of North Carolina. He is a Fellow of the Private Equity Research Consortium, Kenan Institute and serves on the Board of Directors of Highwoods Properties, a publicly traded Real Estate Investment Trust (REIT), and has served on the Investment Advisory Committee of the $100 billion North Carolina Retirement System. ANDREW BAUM is Professor of Practice, Saïd Business School, University of Oxford and Professor Emeritus, University of Reading. He is Director of the Oxford Future of Real Estate Initiative, Chairman of Newcore Capital Management, and has held senior executive and non-executive positions with Grosvenor, The Crown Estate, CBRE Global Investors and others.

Contenu

Acknowledgements xxi

About the Authors xxiii

Preface xxv

Part One Real Estate as an Investment: An Introduction

Chapter 1 Real Estate - The Global Asset 3

1.1 The Global Property Investment Universe 3

1.2 Market Players 6

1.2.1 Investors 6

1.2.2 Fund Managers 9

1.2.3 Advisors 9

1.3 Property - Its Character as an Asset Class 11

1.3.1 Property Depreciates 12

1.3.2 Lease Contracts Control Cash Flows 13

1.3.3 The Supply Side is Inelastic 13

1.3.4 Valuations Influence Performance 14

1.3.5 Property is Not Liquid 15

1.3.6 Large Lot Sizes Produce Specific Risk 16

1.3.7 Leverage is Commonly Used in Real Estate Investment 18

1.3.8 Property Appears to be an Inflation Hedge 19

1.3.9 Property is a Medium-Risk Asset 21

1.3.10 Real Estate Cycles Control Returns 22

1.3.11 Property Appears to be a Diversifying Asset 24

Specific Risk 27

Leverage 27

Illiquidity 28

Taxes, Currency, and Fees 28

1.4 Conclusion 28

Chapter 2 Global Property Markets and Real Estate Cycles, 1950-2020 33

2.1 Introduction and Background 33

2.1.1 The Property Cycle 33

2.2 A Performance History 34

2.2.1 Before 1970: Real Estate Becomes a Medium-Return Asset 34

2.2.2 The 1970s: Inflation, Boom, and Bust 36

The USA 36

The UK 37

2.2.3 The 1980s: New Investors Flood the Real Estate Capital Market 38

The USA 38

The UK 42

2.2.4 The 1990s: The Rise of REITs 43

The USA 43

The UK: Deep Recession, Low Inflation, and Globalization 45

2.2.5 2002-7: A Rising Tide Lifts All Boats 47

The USA 47

The UK 59

2.2.6 The Global Real Estate Credit Crisis Hits 60

The USA 60

The UK 67

2.2.7 The Markets Recover Post-crisis 70

2.3 The Global Market 72

2.3.1 The European Market Develops 72

2.3.2 Asia Emerges 75

2.4 Real Estate Cycles: Conclusion 80

Lesson 1: Too Much Lending to Property is Dangerous 80

Lesson 2: Yields are Mean-Reverting - Unless Real Risk-Free Rates Change 81

Lesson 3: Look at Yields on Index-Linked 81

Chapter 3 Market Fundamentals and Rent 83

3.1 Introduction: The Global Property Cycle and Rent 83

3.2 The Economics of Rent 84

3.2.1 Rent and Operational Profits 84

3.2.2 Theories of Rent 86

Ricardo 86

von Thünen 87

Fisher 89

3.2.3 Rent as the Price of Space 90

3.2.4 Supply 91

3.2.5 Demand 93

The Cyclical Demand for Space 93

The Structural Demand for Space 94

Variations in Locational Demand by Use 95

3.2.6 The Relationship Between Rental Value and Rental Income 97

3.2.7 The Impact of Currency Movements on Rent 99

3.2.8 Property Rents and Inflation 99

3.3 Forecasting Rents 101

3.3.1 Forecasting National Rents 101

Model Types 101

Price 102

Demand 102

Supply 102

Building the Model 104

An Historical Model 104

A Forecasting Model 105

3.3.2 Forecasting at the Local Level 105

Conceptual and Modelling Problems 106

Data Issues 106

3.4 Conclusion 107

Chapter 4 Asset Pricing, Portfolio Theory, and Real Estate 109

4.1 Risk, Return, and Portfolio Theory 109

4.1.1 Introduction 109

4.1.2 Risk and Return 110

4.1.3 Portfolio Theory 111

The Efficient Frontier 111

4.1.4 Risk and Competitors 112

4.1.5 Risk and Liabilities 113

4.1.6 Property Portfolio Management in Practice 113

The Investment Strategy 114

4.2 A Property Appraisal Model 115

4.2.1 Introduction: The Excess Return 115

4.2.2 The Cap Rate or Initial Yield - A Simple Price Indicator 116

UK Terminology 116

US Terminology 117

How are Cap Rates Estimated in Practice? 118

Cap Rates are the Inverse of Price/Earnings Ratios 118

What Drives the Cap Rate? 119

4.2.3 The Fisher Equation 121

4.2.4 A Simple Cash Flow Model 121

4.2.5 Gordon's Growth Model (Constant Income Growth) 122

4.2.6 A Property Valuation Model Including Depreciation 122

4.3 The Model Components 123

4.3.1 The Risk-Free Rate 123

4.3.2 The Risk Premium 124

What is Risk? 124

The Capital Asset Pricing Model 125

4.3.3 Inflation 127

4.3.4 Real Rental Growth 128

4.3.5 Depreciation 128

4.3.6 'Correct' Yields 129

4.3.7 An Analysis in Real Terms 129

4.4 The Required Return for Property Assets 130

4.4.1 The Sector Premium 130

4.4.2 The City Premium 131

4.4.3 The Property Premium 131

4.4.4 Example 131

Tenant 131

Tenure 132

Leases 132

Building 132

Location 132

4.5 Forecasting Real Estate Returns 135

4.5.1 The Origin and Uses of Property Forecasts 135

4.5.2 Forecasting Cap Rates 136

4.5.3 Forecasting Property Cash Flows 138

4.5.4 The Portfolio Model 138 …