Institutional Investments

1
Lecture 16

• Institutional Investments

2
Institutional Investments

• Pension Funds
• Many pension funds have committed 5 or more to
  the real estate sector
• 2004 U.S. Domestic pension funds held over 140
  billion in commercial property equity
• Real Estate Investment Trusts (REITS)

3
Direct Real Estate Investing vs. Stock and Bond
Investing

• Property assets are relatively illiquid and trade
  in a multitude of local private markets rather
  than in centralized public exchanges
• Real estate assets are geographically fixed and
  must serve space markets that are geographically
  segmented
• Property assets trade in whole assets rather
  than in small shares

4
Initial Problems in Direct Real Estate Investment

• Large sums of money required to purchase assets
• Need for property management and asset management
• Illiquidity of real estate investments
• Longer time required to sell
• More expensive to sell

5
Lecture 16

• Evolution of
• Real Estate Products for Institutional Investors

6
Evolution of Real Estate Products for
Institutional Investors

• 1970s Commingled Real Estate Fund (CREF)
• Similar to Limited Partnerships
• Funds from several pension funds pooled to
  purchase a diversified portfolio of commercial
  properties
• Investment Advisor responsible for asset
  management and investment decisions
• Pension fund investors entitled to their pro-rata
  share of income and proceeds
• Investors could buy into or cash out any time on
  the basis of a current appraised value of the
  CREF shares

7
Evolution of Real Estate Products for
Institutional Investors

• Late 1980s Problems in Real Estate Markets
• S L deregulations, tax-induced investing, and
  other sources of money in the market
• Widespread dissatisfaction among pension fund
  clients, pared with collapse in property markets,
  created shake-out and consolidation in real
  estate investment advisory industry through
  mid-1990s.

8
Evolution of Real Estate Products for
Institutional Investors

• 1990s Serious Interest in Publicly-Traded Real
  Estate Securities
• Real Estate Investment Trusts (REITs)
• Commercial Mortgage-Backed Securities (CMBS)
• Pension funds still rely on REIT and CMBS shares
  for their real estate allocations.
• Upturn in commercial property markets offered
  exciting new prospects and opportunities.

9
Public vs. Private Asset Markets

• Liquidity
• Informational Efficiency

10
Lecture 16

• REIT Performance

11
REIT Growth Since 1989
12
REIT Growth Since 1989

• Since 1992
• Small to mid-cap
• Good Liquidity
• Lower leverage 30 - 60
• Cheaper debt, some fixed
• Better-aligned interests and ownership
• More property focus

• Before 1992
• Micro-Cap in Size
• Low Liquidity
• Highly Leveraged
• Variable-Rate Debt
• Advised REITs with little ownership
• Little property-type focus

13
REIT Ownership

• (as an approximate percentage of the value of all
  institutional holdings of the same property type)
• Malls 32
• Hotels 17
• Retail 13
• Apartments 7
• Office 6
• Warehouses 5

14
Lecture 16

• REIT Regulation

15
REIT Regulation

• REITs cannot be closely-held corporations
• No five or fewer individuals may own more than
  50 of the REIT stock must have at least 100
  shareholders
• 75 or more of the REITs total assets must be
  real estate, mortgages, cash, or federal
  government securities, and 75 or more of the
  REITs yearly gross income must be derived
  directly or indirectly from real estate property

16
REIT Regulation

• 90 or more of the REITs annual taxable income
  must be distributed to shareholders as annual
  dividends
• REITs must derive their income from primarily
  passive sources like rents and mortgage interest,
  and not from short-term trading and the like.

17
Lecture 16

• Industry Associations

18
Industry Associations

• Pension Real Estate Association (PREA)
• National Council of Real Estate Investment
  Fiduciaries (NCREIF)
• Association for Investment Management and
  Research (AIMR)
• National Association of Real Estate Investment
  Trusts (NAREIT)
• Real Estate Research Institute (RERI)