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Immobilienentwicklung 2 > Real Estate Financing > Flashcards

Real Estate Financing Flashcards

1
Q

Sources of Real Estate Financing

A

public (REITs, CMBS) <> private (Mezzanine, Opportunity Funds)

equity (REITs, Opportunity Funds) <> debt (CMBS, Mezzanine)

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2
Q

Real Estate Equity Investment

A
  • direct real estate investments

- indirect real estate investments (listed [REITs, REOCs] and unlisted [open-, closed-ended structures])

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3
Q

Direct Real Estate Investment

A

hard to be diversified properly because of high capital intensity high number of different markets

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4
Q

Comparison of Real Estate Equity Investments (Direct Real Estate)

A

Direct Real Estate

  • high control
  • high transparency
  • low volatilty
  • high diversifaction to other asset classes
  • low diversifaction of property rist
  • low liquidty
  • high instant exposure/ draw down
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5
Q

Comparison of Real Estate Equity Investments (Listed Funds)

A
  • limited control
  • high transparency
  • high volatilty
  • low-medium diversification to other asset classes
  • high diversifaction of property risk
  • high liquidity
  • high instant exposure/ draw down
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6
Q

Comparison of Real Estate Equity Investments (Open-ended - usually core)

A
  • low control
  • medium transparency
  • low volatility
  • high diversification to other asset classes
  • high diversification of property risk
  • medium-high liquidity
  • medium-high instant exposure/ draw down
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7
Q

Comparison of Real Estate Equity Investments (Closed-ended - usually value added/ opportunistic)

A
  • low-medium control
  • medium transparency
  • medium volatility
  • medium diversification to other asset classes
  • medium diversification of property risk
  • limited liquidity
  • low instant exposure/ draw down
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8
Q

Determining characteristics of real estate private equity funds

A
  • investors
  • fund structures
  • investment managers
  • strategies/ risk structure
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9
Q

How do investors look at (real estate) investment options?

A
  • absolute value (total return, income, appreciation)
  • relative value (return vs. alternatives, return vs. risk, alpha, beta)
  • diversification (geography, sector, currency, demographic)
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10
Q

Real assets options

A
  • equity vs debt
  • public vs private
  • income vs growth
  • …
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11
Q

Sources of Real Estate Private Equity

A 
Institutional investors:
-public pension funds
-private pension funds
-insurance companies
-corporates
-sovereign wealth funds
-banks
Private investors (feeder vehicle):
-high net worth individuals
-retail clients
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12
Q

Investor execution options (level of delegation, expertised management)

A 
High level of expertised management
-in house
-joint venture
-programmatic venture
-seperate account
-commingled fund
-fund of fund
High level of delegation
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13
Q

Real Estate Private Equity investment cycle (J-Curve)

A
  • capital commitment with fund closing
  • capital calls during investment period
  • capital repayment at exit
  • repayment might start before final capital call
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14
Q

Investment Characteristics (determining factors)

A
  • location
  • sector
  • deal access
  • holding period
  • risk taking
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15
Q

Range of Investment Styles

A

Cash dividend oriented:

  • core (fully leased multi-tenant property)
  • core-plus (stable lease roll, moderate NOI upside)

Total return oriented:

  • value added (repositioning, moderate development)
  • opportunistic (distressed sellers, significant redevelopment)
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16
Q

Trends in Real Estate Private Equity (post GFC)

A
  • direct investing, joint ventures & clubs
  • income and preservation of capital
  • less leverage, cautious on secondary locations
  • stronger home bias
  • longer-term holds to maximize equity multiples and reduce re-investment risk
17
Q

Leverage (why using leverage?)

A
  • insufficient funding
  • diversifying equity
  • tax shield of interest payments
  • leverage effect (higher returns on equity)
18
Q

Real Estate Financing (Equity and Debt)

A

Equity Financing:

  • open/ closed ended funds
  • institutional investors
  • private equity funds
  • stock based real estate companies

Debt Financing:

  • mortgage backed loan
  • asset securitisation
  • joint venture financing
  • real estate leasing

Hybrid Financing:

  • mezzanine financing
  • participating mortgage
  • convertible mortgage
19
Q

Financing Process (Phase I-V)

A
  • Investment Decision (project valuation, budget, feasability, DD) [Developer]
  • Credit Analysis (Documentation, Communication) [Developer/ Bank]
  • Mandate (Offer, Term Sheet, Mezzanine Capital) [Bank/ Developer]
  • Term Sheet (Adjustment of hard facts, term sheet II, underwriting risks, loan contract) [Bank/ Developers]
  • Capital Market (info-memo, refinancing, securitization) [Bank/ Capital Market]
20
Q

100% Leverage

A

Bank A: 60% loan backed by property

Bank B: 40% loan (asset backed financing, subscription financing [undrawn equity commitments])

21
Q

Profit distribution (in general)

A
  • Return of Debt
  • Return of Equity
  • Prefered return (preference tranche)
  • catch-up tranche
  • promote tranche
22
Q

Leveraged/ unleveraged returns

A

-operating with or without the use of borrowed money

Relevance:

  • lower cost of capital
  • if cost of debt is less than the unlevered project return, then leverage will increase equity returns (positive leverage effect)
23
Q

Initial yield

A

= annual NOI / project cost

24
Q

yield on cost

A

= net cash flow / project cost

25
Q

yield on equity

A

= cash flow after debt service / equity investment

26
Q

Internal Rate of Return (IRR)

A
  • discount rate at which NPV equals 0
  • represents the annual compounded average total return on investment
  • technical problem when cashflow has more than two changes between + and -
27
Q

profit on cost

A

= profit after tax / total project cost

  • indication on how much risk is involved in a project
  • static ratio, no indication about timing and performance
28
Q

equity multiple

A

= (equity invested + profit) / equity invested

-static ratio, no indication about timing or leverage

29
Q

DCF Valuation Procedure

A
  • forecast the expected future payments
  • define the required total return
  • discount the future payments to present value at required rate of return

The present value reflects the maximum you can pay for the investment to still achieve your required return

-NPV never below zero, but NPV = 0 is ok

30
Q

Inverted DCF Procedure

A

instead of calculating the value associated with a given expected return, calculate the expected return (IRR) associated with a given price for the property

  • maximise difference between IRR and required return
  • never do deal with IRR
31
Q

Hedging (Natural Hedging & Hedging Instruments)

A

Natural Hedging:

  • Loans in local currency
  • higher LTV
  • inflation/ currency exchange rate

Hedging instruments:

  • swaps
  • caps
  • forwards
  • collars
32
Q

Crucial Real Estate Risks

A
  • Interest rate
  • currency
  • commodity prices
33
Q

Gründe für indirekte Investements

A
  • Specialist asset management
  • tax efficient cross border structures
  • alignement of interest
  • access to off balance sheet gearing

Immobilienentwicklung 2 (8 decks)

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