Chapter 14 Flashcards
what is commercial property
retail shops
offices
industrial units
hotels
which commerical property produce the highest and lowest yields
industrial units highest
retail shops the lowest
key risk to commercial property
rising level of vacancy called void periods
which type of property is more illiquid
commercial property
characteristics of commerical property investment
large initial outlay
long term contracts
tenant responsible
rent linked to income potential
characteristicals of residential investment property
holiday homes or buy to lets
short term renewable leases usually
usually landlord responsible
rent linked to house price
features of property market
segmented
indivisible (cant split up property easily)
higher transaction costs
decentralised (no central market place like LSE)
requires maintainance
subject to strict government regs
benefits of an investment in property
less volatile returns
risk diversification
regualr income plus capital gain
inflation hedge
property has residual value
indirect property investment through…
traditional property fund
real estate investment trust funds
benefits to indirect property investment
more liquid than direct
increase diversification
lower transaction costs
direct property investment is…
investing in the property yourself
examples of cost of buying and selling a property
legal
stamp duty
survey costs
estate agents costs
maintenance costs
who are the highest and lowest owners of commercial property and their percentage
overseas investors at 31%
private investors at 3%
how are commercial properties often valued
10 times their rental income
10k rental income means property worth 1million
rental yield formula
(gross rent - expenses)/property cost
what are property bonds
issued by life assurance companies where the coupons are linked to the underlying value and rental income from the property
what is the structure of a property bonds
the dividends or coupons payable on property bonds are secured by the rental flows
property income certificates
gives indirect exposure to income and growth of property. certificates linked to specific property
REITs?
form of indirect investment set up in 2007.
characteristics of a REIT
pooled investment
closed ended funds
shares fluctuate on market
allowed to borrow in order to invest
specific unique REIT charecteristics
plc listed on LSE or AIM
at least 90% of taxable income must be paid out to investors
no cap gains tax within fund
no investor greater than 10%
min of 3 properties, max 40% holding
property derivative and why good
contract based on real estate property index
exposure to property market without the physical transaction in it
property index providers
Investment property database
ONS
nationwide building society
Halifax
Land regisrty
uses of property derivates
gain or reduce property exposure
hedge positions
speculate on property market
alter portfolio composition
limiattions of indices
limited ability target specific segments of market
sample size can differ
no standard approach to create index
time lags
index based on sample
compare market value with investment value
market value is independant of the investor
investment value is driven by how the property is used
type of property valuation techniques
cost approach
sales comparison
income approach
cost approach property valuation
based on what it would cost to buy the land and then to actually build the property
why is cost apporach valuation not ideal and example
replacement cost different to market value
1 in 3 new builds is profits for the builder
sales comparison approach
market value based on similar properties bought and sold around the same time
what is hedonic pricing
extension of sales comparison valuation, uses regression to estimate what individual characteristics of house are worth
income approach valuation technique
property value = net operating income / market cap rate
how is net operating income calculated
gross operating income minus expenses
examples of expenses fro proeprty
vacancy rates, insurane, proeprty taxes and maintainance
example of environmental issues
land contamination and pollution
examples of social issues
health and safety of employees on projects
properties that are more efficient can…
reduce operating costs
increase rents
reduce vacancy
letter QOL
increase productivity of workers
Why are alternatives liked
Low correlation to conventional asset classes = risk diversifiers
Commodities markets (4)
Energy ( oil gas)
Precious metals ( gold silver platinum)
Base metals (iron copper lead)
Agriculture (grain sugar sand)
What are hard and soft commodities
Hard - has to be mined or extracted
Soft - agriculture or livestock
Ways to invest in commodities
ETF
Physically
Stock of company who directly deals with commodity
Future market
Benefits and cons of investment into commodities through buying stock of firms who deal with them
Easy to access liquid
Less volatile share price
Share price is affected by other factors other than commodities
CTAs
Commodity trading advisor
Investor in futures via collective investment vehicle like hedge fund
What do commodity etfs offer exposure to
Movements in the futures prices of underlying commodity
What is roll return or roll yield
Difference between spot and futures price due to commodity funds must periodically roll into new futures as existing futures expire
What is negative roll yield and why
If futures curve slopes upwards, each subsequent months future price is progressively higher (contango)
Bc firm sells relative low priced futures contracts and buys higher priced futures contracts
One word, what gives positive roll yield
Backwardation
What is negative of holding futures contract vs physical asset
Might not be able to replicate returns
Major exchanges for energy derivatives
New York mercantile exchange
Ice futures Europe London
What percentage of futures contracts are delivered
2%
Where are commodity derivatives traded
Stock exchanges or OTC
What negative of otc commodity derivative
Each counterparty must bear each others credit risk
Which exchange dominates non ferrous metal futures
London metal exchange
How are carbon prices quoted
Euros per tonne of CO2
How are precious metals considered
Volatile
What to consider when buying Presicous metals
Cost of storage or issuance
Absence of a yield
Potential for quality issues
Factors that affect gold
Financial instability
Inflation
geopolitical tension
What is more volatile, silver or gold and why
Silver
New demand from batteries and photography
Features of platinum, where’s demand and how is price affected.
More expensive than gold as it is rarer
Demand from automotive catalyst
Prices affected by geopolitical tensions
Platinum mines in Russia and southafric
What type of index is the (FTSE / CoreCommodity CRB Index ) and where does it trade
Weighted arithmetic average of 19 categories
Ice futures exchange
Weighting of the CRB index
Energy 33%
Agriculture 42%
Precious 20%
Base metals 5%
How are commodities also organised in the CRB index
By liquidity
What are the other main commodity index’s
S and p Goldman Sachs commodity index
Dow jones commodity index
Bloomberg commodities index
Roger’s international commodity index
How is S and p Dow jones index done
Weights based on 5 year moving average
How is Bloomberg index done
Based on liquidity data and production data
How is the Roger’s international commodity index done
Composite total return index based on the value of a basket of commodities tracked via a futures contact of 38 different exchanges
Why is a commodity included in index
If it plays significant role in global consumption
Why are commodities good as inflation or event risk
Commodity indices have low or negative correlation to equity and long term bonds
What is commodity relationship with inflation
Positive correlation
Crypto currency
Piece of digital code that is traded as an asset and built on a block chain
What is a block chain
Blockchain database is a number of blocks chained together, wthrough a reference in each block about the previous block, each block records one or more transactions,p (changes in listed ownership of assets)
Why crypto made
Mode of online payment which is fully secure due to use of encryption techniques
What are fiat currencies and crypto currencies backed by
Fiat currencies are centralised and backed by governments
Crypto is decentralised and not regulated by any government or authority
Does fiat or crypto require financial intermediary to make transfers
Fiat
What is the supply of fiat and crypto
Fiat currencies supply technically unlimited whereas crypto is not
What are the benefits and limitations of transfers for crypto and fiat currencies
Fiat transfer considered safer as transaction is visible to both parties
Crypto transactions happen anonymously
What is satoshi
The creator of the crypto currency
Means transactions are acceptable in the 100th million part
Which type of currency is better for cross border transactions
No restrictions for crypto and uniform value across the globe
What is block chain also known as and what is it
Digital ledger technology
System of recording information that is impossible to change
What is the consensus mechanism in digital ledger tech
New blacks added to the chain through consensus mechanism in which members of bloackchain confirm transactions as valid
Why are smart contracts good for blockchain
Eliminates need for intermediary and saves businesses both time and money whilst ensuring real time compliance
Two challenges for blockchain
Technical and business
Regulatory
What are the main crypto coin
Bitcoins
Alt coins:
Ethereum
Defi
When did bitcoins start
2009 when gpfirst genesis block was mined
What is th eupper limit of bitcoins
21 million
What is ripple
Crypto currency with coin called xrp
Users can bypass banks and make loans and open credit lines with each other
What is ethereum
Coin called ether
Decentralised software platform that enables smart contracts.
What are stable coins
Crypto currencies pegged to other assets including traditional fiat currencies such as dollar, much lower vol than normal crypto
Characteristic of crypto in portfolio
Low correlation
High vol
Potentially good for evading taxes and lie outside regs system
Why aren’t hedge funds marketable investments
They are not regulated, fca regulates the managers of hedge funds in UK but not the funds themselves
What are hedge funds often referred as and why
Target funds or absolute return funds
As they don’t follow bench but rather strive for continuous non negative return
How are hedge funds structured
Investment vehicle that is structured as a corporation or partnership and is managed by an investment manager who is legally seperate from the fund and its asset s
What are the liabilities for LPs and GPs
Liability for LP is just their initial investment
For GP the liability is unlimited eventhough the form will be a limited liability company
How do investment banks assist hedge funds
Each fund has prime brokers to provide services like trade execution, clearing, settlement, leverage etc
How do hedge funds differ from conventional asset managers
Hf More active and use leverage and shorting (more techniques)
Hf have more flexibility in investment policy
Hf have absolute return target whereas conventional return is compared to benchmark
Incentive fee for hf
Liquidity is lower
Higher net worth investor base and lock up periods
Hf less transparent
Hurdle rate for HF
Certain rate must be earned before firm can earn performance fee on it
Market neutral (RV) funds objective and what is it
Limited correlation to traditional equities
Highly quantitative and try to exploit mispricings
Event driven funds
Make profit from when particular event occurs like a merger
Tactical trading hf strategy features
Speculate on direction of market prices of assets
May be systematic or discretionary
Most volatile strategy
Benefits of fund of hedge funds and limitation.
Diversification
Access to hedge funds
Access to expertise
Tow layers of costs
What is a key feature of infrastructure investing and why
Gearing
Gearing is higher as cash flows more predictable
How is private credit perceived
Illiquid asset
What is the general statement about private assets
Higher returns but lower liquidity and low correlation and lower volatility
Why are there higher returns for private assets
Illiquidity premium due to high barriers to entry, longe reinvestment periods, capital locked up
What can private equity do
Help provide financing to start ups or for buy outs
How are PE firms structured
Funds structured as partnerships
So investors are LPs and managers (coinvestors) are GPs
What are PE fund time periods
Investing period - first half of the fund life
Harvesting period - second half of funds life (profits realised)
What can happen if not all investments have been liquidated
Extension periods are possible although investors can sell their interest. In the secondary market
No tax leakage
What is general fee structure of PE fund
1 or 2 percent management fee
20 percent carried interest cost
What is carried interest
Investment returns over a pre agreed rate (hurdle rate(
Three main financing stages in company life cycle
Venture capital - high risk high return
Growth capital - companies looking to expand or restructure
Buy out investments
Explain buy out investments
taking stake in private company where they have control over company direction.
Often buy mature well established firms usually with the intent to buy further business, support the firms managers with their acquisition plan, and then do cost restructuring or sale of assets
What is special situations fund
Type of PE fund that focuses on dirstessed firms, turnarounds
3 types of pe investment s
Primary
Secondary
Co investments
What are primary pe investments
Newly constructed closed end pe partnerships. Capital is called form investors and invested as opps arise
What are secondary pe investments
Existing limited partners pe interest available on secondary market
Shorter investment periods and accelerated returns on invested capital
They are investing in existing pool of assets and not going in blind
Co investments what are they
Direct investment by LP is the a company alongside a private equity fund, occurs when one fund wants to acquire stake in company that is larger than it is allowed by diversification rules
Allows LP to increase exposure and no fees involved in direct investment into company
Equity contribution LBOs
Around 50 percent in 2009
Why is no daily valuations good for PE funds
Allow companies to take longer term view for executing strategy and restructuring
How is timing pattern of cash flows depicted
J curve
Initial cash outflows but hopefully flows become positive after 7 years
Two measures to assess pe firms
Investment multiples and IrR
Why is IRR appropriate for pe investment
Captures timing of cash flows
Two popular investment multiples
Total value to paid in - fund total value as multiple of cost base
Fund total value = value of investments plus value of distributions
Distributed to paid in = cumulative distributions / capital called
If distribute to paid in (DPI) is greater than one…
Investor has made money net of fees and carry
What is NAV for pe fund
Relies on estimated discounted cash flows
Often called residual value = value of investments remaining in portfolio
How does the MSCI property databank indices of comm property constructed
Portfolio valuations
Who publishes reference rates for oil and oil related products
Platts
Risks of direct property investment
Location
Building quality
Tenant quality
Lease options
Break clauses
