3: Real Assets Flashcards
What are the disadvantages of RE investing?
- Heterogeneity
- Illiquidity
- Lumpiness, this points to the fact that RE is an “indivisible” asset
What are the benefits of RE investing?
- Diversification
- Income Tax Advantages
- Absolute returns
- Cash flow streams
- Hedge against unanticipated inflation
Potential benefits of RE derivatives
- Price Discovery
- Better risk management
- capacity to short sell real estate
Classifications of RE
Equity vs. Debt
International vs. Domestic
Residential vs. Commercial
Private vs. Public
As-if Basis for calculating changes in value of NCREIF NPI index
The change in the underlying property is calculated as-if the property was purchased at its appraised value at the beginning of the quarter and sold at the end of quarter appraised values.
If the property is actually bought or sold, then the transaction price is used
2 ways RE investors can choose between FI or equity investments
1) choose between a bond like investment that pays principle and interest or an equity like investment that generates return by value appreciation
2) choose between early (equity-like) or later (debt-like) stages of development
3 advantages and limitations of timberland investing
3 advantages:
1) attractive risk adjusted returns, especially vs. stocks and bonds
2) inflation hedging due to positive correlation with inflation
3) diversification due to low correlation with other asset classes
3 disadvantages:
1) illiquidity
2) long investment period, esp given long rotation periods
3) difficulty of timberland valuation
3 steps to unsmooth smoothed returns that have autocorrelation
1) specify the form of autocorrelation (first-order or higher)
2) estimate parameters of the autocorrelation process
3) use the estimated autocorrelation coefficient to decipher the true return series
3 elements of rollover risk in RE
1) Change in financing
2) Change in the nature of the RE investment
3) Change in ownership
Advantages of private RE equity
- ability to select properties
- direct control
- tax timing
Advantages of public RE investment
- easier investor access
- greater liquidity
- low transaction costs
- improved corp gov
- transparency
Fisher effect
Nominal interest rate = real interest rate + premium for anticipated inflation
Why is quality price information scarce in RE?
- uniqueness of properties
- long holding periods
- confidentiality of transaction information
2 criticisms of Repeat sales index
- heavily represents properties with the most transactions
- changed value of properties that sold may be due to property specific events (ie renovations)
Hedonic price index
Use observed prices of traded properties to infer prices of non traded properties
Risks of international RE value
- volatility of asset in local currency
- volatility of exchange rate
Motivations of adding farmland
- inflation hedge
- diversification
- increasing value due to food or energy shortage
Risks of farmland investing
- greater integration of agricultural and energy markets
- expropriation
Risks to patent investments
- illiquidity
- tech/operational risk
- obsolescence
- macro/ sector risk
- regulatory risk
- legal risk
- expiration risk
IP related strategies
1: acquisition and licensing
2: enforcement and litigation
3: sale license back
4: patent lending strategies (securitization and / or mezz lending
5: patent sales
6: patent pooling
Economic characteristics of infrastructure
1: high barriers to entry
2: economies of scale
3: inelastic demand for services
4: low operating costs
5: long duration
Financial characteristics of infrastructure
Attractive returns Long term, stable and predictable CFs Low correlation Inflation hedge Good for long term pension liabilities Low sensitivity to market changes Low default rates Socially responsible investing
Risks of infrastructure projects / companies
Construction, operational, business, leverage, refinancing, legal, regulatory, environmental, political, social
Infrastructure risks at fund level
Concentration
Illiquidity
Pricing
Governance
Infrastructure risks for investors
Lack of experience Investment program Integration in ALM Timing of investment Advisers/counter parties Legal Reputation
Ways of selling timber
1: negotiated sales
2: bidding or auction system
3: wood supply agreement
Sawtimber
Large logs processed into lumber
Pulpwood
Processed into chips of flakes
Good got paper manufacturers, diapers etc
Other ways to generate income from Timberland investments
1: recreational licenses/leases
2: mineral rights
3: right of way and access rights
4: wetlands and stream mitigation banking
5: species and conservation banking
6: carbon credits
Steps for effective commodities risk management (EMSMPM)
- Estimate NAV
- Measure event risks
- Stress test w/ VAR
- Measure liquidity risks
- Performance attribution
- Mitigate operational risks
3 ways to stress test a commodities portfolio
- Scenario analysis by mimicking extreme historic events
- Shock FMEs and observe changes to the NAV
- Shift forward curves and observe changes to the NAV
Historical relationship between spot commodity prices and futures commodity prices
- highly positively correlated
- futures holders earn greater returns than spot commodities holders
- both prices exceed inflation
4 theoretical frameworks for commodity futures excess returns
- CAPM : the premise is that expected return depends on amount of systematic risk, highly questionable
- Insurance perspective: predicated on normal backwardation, most hedgers have a long position in commodities and most speculators are short. The positive risk premium paid by hedgers is considered an insurance risk premium paid to investors with long positions in commodity futures
- Hedging Pressure Hypothesis: Extends the insurance perspective and assumes that hedgers/speculators may be net long or short futures, depending on their positions in the underlying commodities. So risk premiums exist in future prices whether the commodity is in contango or backwardated. Risk premiums can be positive/negative depending on the net position of hedgers/speculators
- Storage theory: uses reasons for holding inventory to explain the source of commodity futures excess returns. Theory contends that futures prices are dependant on storage costs, convenience yield and risk free rates. Recollect that Futures Price = Spot Price x e^ (r-y+c), where Y is the convenience yield and C is the storage cost. Main thing: convenience yield is high when inventories are low.
Durable assets
used in the production of a good/service but are not consumed in it
Non durable assets
consumed in the production of a good/service
