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