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Article
Publication date: 1 February 2007

Jörg Frehse

The significance of private equity as a form of financing and investing has led to growing interest in the real estate economy over the past few years. Anglo‐American…

1310

Abstract

The significance of private equity as a form of financing and investing has led to growing interest in the real estate economy over the past few years. Anglo‐American investors in particular are currently engaged in large‐scale real estate transactions and have now become the most important group of investors in the European hotel real estate market. However, for private equity funds, the high risk of investing in complex tourism and specialized real estate such as hotels is always coupled with an expectation of returns well above the market average. Yet actually achieving above market returns is not always accomplished. This paper therefore deals with the question of why some real estate private equity investors succeed in getting returns above the total market average even in the overall bear Western European market environment while others fail to do so. It shows that one formula for success includes deliberately exploiting market imperfections und overcoming inefficient information policies.

Details

Tourism Review, vol. 62 no. 1
Type: Research Article
ISSN: 1660-5373

Keywords

Article
Publication date: 20 July 2010

Ilkka Tomperi

This paper aims to focus on the performance of private equity real estate funds. Since many institutional investors have special programs to invest with first time…

1828

Abstract

Purpose

This paper aims to focus on the performance of private equity real estate funds. Since many institutional investors have special programs to invest with first time managers, or emerging fund managers, it also seeks further evidence on how persistent the performance of real estate funds is and how the growth in fund size affects the realised returns of a fund.

Design/methodology/approach

The analyses performed are based on a large global sample of value‐added and opportunistic private real estate funds. Different model specifications are used to study the fund and sponsor‐related factors' correlation with fund performance.

Findings

It is shown that the realised performance is positively correlated with fund size but negatively correlated with the sequence number of the fund supporting the fact that emerging managers are likelier to achieve good returns. The data also reveal trends in fund performance and the growth of the fund size. Evidence from private equity buy‐out funds has also shown that better performing fund managers are likely to raise follow‐on funds and often larger funds than poorly performing fund managers which is also confirmed by the findings of this paper. There is also an evidence that top‐performing funds do not grow proportionally as much as the average funds.

Research limitations/implications

Actual datasets used in the regression models are often limited by exclusion of immature funds to enhance reliability of results.

Originality/value

This paper expands the recent studies on private equity to private real estate, an area that has experienced substantial growth during the past ten years.

Details

Journal of European Real Estate Research, vol. 3 no. 2
Type: Research Article
ISSN: 1753-9269

Keywords

Case study
Publication date: 20 January 2017

Craig Furfine

In the summer of 2013, Whitney DeSoto had just been hired as managing director for real assets at the Overton Pension Fund (OPF). Her task was to provide recommendations…

Abstract

In the summer of 2013, Whitney DeSoto had just been hired as managing director for real assets at the Overton Pension Fund (OPF). Her task was to provide recommendations to the board of trustees to introduce real estate into the fund's portfolio, which to date had been invested solely in stocks and bonds. Combining her knowledge of modern portfolio theory with her institutional expertise in real estate, DeSoto needed to decide what fraction of the fund should optimally be invested in real assets. She then faced the task of deciding whether to invest in public or private real estate. If she thought private real estate belonged in the portfolio, she would need to identify the best investment strategy, the best vehicle, and ultimately the specific investments to recommend.

  • Apply modern portfolio theory to the investment decision of an institutional investor allocating its assets between stocks, bonds, and real estate

  • Understand the limits of portfolio theory in a real estate context

  • Analyze the benefits/costs of investments in both public and private real estate

  • Understand the various vehicles in which one can invest in private real estate

  • Argue for a set of investments that offer individual benefits/costs relative to a theoretically ideal investment

Apply modern portfolio theory to the investment decision of an institutional investor allocating its assets between stocks, bonds, and real estate

Understand the limits of portfolio theory in a real estate context

Analyze the benefits/costs of investments in both public and private real estate

Understand the various vehicles in which one can invest in private real estate

Argue for a set of investments that offer individual benefits/costs relative to a theoretically ideal investment

Details

Kellogg School of Management Cases, vol. no.
Type: Case Study
ISSN: 2474-6568
Published by: Kellogg School of Management

Keywords

Article
Publication date: 7 March 2008

Martin Hoesli and Jon Lekander

This paper aims to review major changes on real estate markets in Europe and to analyse the impacts of such changes.

6064

Abstract

Purpose

This paper aims to review major changes on real estate markets in Europe and to analyse the impacts of such changes.

Design/methodology/approach

The paper provides an overview of the various equity real estate investment vehicles available to investors, with particular focus on the pros and cons of each type of vehicle. The paper also includes an analysis of the impacts of product innovation on real estate markets and on portfolio strategy.

Findings

The changes on real estate markets have led to considerable amounts of capital being allocated to the asset class. Portfolio strategies should be substantially more flexible.

Research limitations/implications

As many of the new products have been created in bullish real estate markets, it is important to assess the impacts of a market downturn on portfolio performance.

Practical implications

A good understanding of available products with their pros and cons is necessary for a sound investment strategy.

Originality/value

The paper is one of the very few papers that discuss the major institutional changes that have occurred on European real estate markets.

Details

Journal of Property Investment & Finance, vol. 26 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 28 October 2014

Thillai Rajan Annamalai, Bharat Bansal and Josephine Gemson

The purpose of this paper is to understand the trends and contribution of private equity (PE) investors in real estate development in India because the real estate sector…

Abstract

Purpose

The purpose of this paper is to understand the trends and contribution of private equity (PE) investors in real estate development in India because the real estate sector in India had witnessed significant investments from PE firms in recent years.

Design/methodology/approach

The study focused on residential segment of real estate development, as it is the largest among all the segments. Two types of analyses have been done in this paper: first was to compare residential projects with PE investment with those that did not have any PE investment. The results were based on an analysis of 453 residential projects. The second was an analysis of only those projects that had PE investment. This paper studied if there were differences in investment patterns between domestic and foreign PE investors, and dedicated and diversified PE investors.

Findings

Projects with PE investment were larger, as compared to projects that did not have any PE investment. The results of this paper also showed that PE firms preferred to invest with developers who had significant experience in undertaking larger-sized projects. PE investments significantly happened in projects that were located in metro cities. While PE firms as a whole preferred to invest in project mode, domestic investors were more inclined to invest in a project structure as compared to foreign PE firms. Though foreign PE firms invested more amounts per deal on average, there was a negative relationship between foreign PE firms and the extent of their shareholding in the investment.

Practical implications

Encouraging PE investment in real estate projects would contribute toward to increasing the transparency in the sector. Strengthening the domestic PE industry would increase investment flow for real estate projects. PE investors who are able to add value to their investments are able to obtain higher shareholding.

Originality/value

Empirical research on Indian real estate industry is scarce because of the lack of transparency and availability of reliable data. This is one of the initial studies on the Indian real estate sector based on a robust dataset.

Details

Journal of Financial Management of Property and Construction, vol. 19 no. 3
Type: Research Article
ISSN: 1366-4387

Keywords

Article
Publication date: 8 August 2022

Srijana Baral and Bin Mei

The purpose of this study is to examine the return sensitivity of public farmland and timberland real estate investment trusts (REITs) to private-equity farmland…

Abstract

Purpose

The purpose of this study is to examine the return sensitivity of public farmland and timberland real estate investment trusts (REITs) to private-equity farmland, timberland and real estate, long-term corporate bonds and large- and small-cap stocks. The study also examines time-dependent contributions of selected asset classes to farmland and timberland REIT volatility.

Design/methodology/approach

The authors use a multi-factor asset pricing model under a seemingly unrelated regression framework to evaluate farmland and timberland REIT returns, and a state-space model with the Kalman filter to evaluate the time-dependent contributors of farmland and timberland REIT volatility. The authors first perform orthogonalized regressions to obtain pure independent factors, and then decompose volatility into individual asset components.

Findings

Significant loadings on financial assets are found for both farmland and timberland REITs, suggesting that they are generally driven by some common state variables. Large-cap stocks are found to be the major contributor of farmland and timberland REIT volatility, despite some differing patterns over time.

Originality/value

Empirical analysis of farmland REIT is very scarce. The authors compare the risk-return characteristics of farmland and timberland REITs under a state-space framework with the Kalman filter. This study can improve the understanding of the roles of farmland and timberland REITs in a multi-asset portfolio.

Details

Agricultural Finance Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0002-1466

Keywords

Article
Publication date: 5 May 2021

Giacomo Morri, Ugo Perini and Rachele Anconetani

The paper aims to investigate the performance determinants of European non-listed private equity real estate funds between 2001 and 2014.

Abstract

Purpose

The paper aims to investigate the performance determinants of European non-listed private equity real estate funds between 2001 and 2014.

Design/methodology/approach

Using a sample of 363 funds collected from the Inrev database, the analysis evaluated the impact of fees and other intrinsic characteristics of these funds, such as leverage, size and duration, on the funds’ performance, intending to enhance the understanding underlying their relationship.

Findings

The findings show a negative relationship between the return of the funds and redemption fee, performance fee and management fee. Conversely, marketing fees have a positive effect on performance. When analyzing the investment style, the results reveal inhomogeneous behaviors of leverage on funds’ performance. This variable has a positive impact on the return in core funds, while there is a negative relationship in value-added investments. Finally, the emphasis on the global financial crisis shows that the effects of the independent variables on the performance do not significantly change in different economic cycles.

Practical implications

The practical implication of the research is to understand whether an investor can direct its resources in a fund, leveraging on certain intrinsic characteristics that can be observed a priori.

Originality/value

Even if there is a considerable body of literature on determinants of performance in European non-listed real estate funds, little research has analyzed the role of fees in driving their results. Besides, this paper takes advantage of observations from different investment styles to emphasize the impact of higher or lower risk profiles and from the full economic cycle to understand the effects of the crisis period.

Details

Journal of European Real Estate Research , vol. 14 no. 2
Type: Research Article
ISSN: 1753-9269

Keywords

Article
Publication date: 22 August 2018

Frank Kwakutse Ametefe, Steven Devaney and Simon Andrew Stevenson

The purpose of this paper is to establish an optimum mix of liquid, publicly traded assets that may be added to a real estate portfolio, such as those held by open-ended…

Abstract

Purpose

The purpose of this paper is to establish an optimum mix of liquid, publicly traded assets that may be added to a real estate portfolio, such as those held by open-ended funds, to provide the liquidity required by institutional investors, such as UK defined contribution pension funds. This is with the objective of securing liquidity while not unduly compromising the risk-return characteristics of the underlying asset class. This paper considers the best mix of liquid assets at different thresholds for a liquid asset allocation, with the performance then evaluated against that of a direct real estate benchmark index.

Design/methodology/approach

The authors employ a mean-tracking error optimisation approach in determining the optimal combination of liquid assets that can be added to a real estate fund portfolio. The returns of the optimised portfolios are compared to the returns for portfolios that employ the use of either cash or listed real estate alone as a liquidity buffer. Multivariate generalised autoregressive models are used along with rolling correlations and tracking errors to gauge the effectiveness of the various portfolios in tracking the performance of the benchmark index.

Findings

The results indicate that applying formal optimisation techniques leads to a considerable improvement in the ability of the returns from blended real estate portfolios to track the underlying real estate market. This is the case at a number of different thresholds for the liquid asset allocation and in cases where a minimum return requirement is imposed.

Practical implications

The results suggest that real estate fund managers can realise the liquidity benefits of incorporating publicly traded assets into their portfolios without sacrificing the ability to deliver real estate-like returns. However, in order to do so, a wider range of liquid assets must be considered, not just cash.

Originality/value

Despite their importance in the real estate investment industry, comparatively few studies have examined the structure and operation of open-ended real estate funds. To the authors’ knowledge, this is the first study to analyse the optimal composition of liquid assets within blended or hybrid real estate portfolios.

Details

Journal of Property Investment & Finance, vol. 37 no. 1
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 7 March 2008

John Corgel and Scott Gibson

The purpose of this paper is to demonstrate how fixed‐share prices, as a structural flaw in private equity funds targeted to small‐unit investors, economically…

1605

Abstract

Purpose

The purpose of this paper is to demonstrate how fixed‐share prices, as a structural flaw in private equity funds targeted to small‐unit investors, economically disadvantages those investors in favor of sponsors.

Design/methodology/approach

The theoretical model incorporates fixed share prices with continuous investment opportunity and evaluates the wealth transfer from long‐term investors to marketing affiliates and soliciting dealers in the form of fees paid on the sale of shares to follow‐on investors.

Findings

This result holds in the presence of high‐payout dividend policy that attempts to compensate for wealth transfer.

Research limitations/implications

Should share prices be marked‐to‐market using real estate appraisals or another method, the unlisted REIT and related offerings, such as tenant‐in‐common funds, will be profitable for sponsors without economically disadvantaging long‐term investors.

Practical implications

The findings from this research are useful to fund sponsors who design real estate investment products for small‐unit investors. These products may retain the advantageous characteristics of existing products while eliminating the disadvantageous features.

Originality/value

This is the first academic research on private equity capital raised from small‐unit investors.

Details

Journal of Property Investment & Finance, vol. 26 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Case study
Publication date: 20 January 2017

Craig Furfine

Wildcat Capital Investors is a small real estate private equity company. Its MBA intern, Jessica Zaski, is asked to develop a financial model for the purchase of Financial…

Abstract

Wildcat Capital Investors is a small real estate private equity company. Its MBA intern, Jessica Zaski, is asked to develop a financial model for the purchase of Financial Commons, a 90,000 square foot office building in suburban Chicago. By simple metrics, the property seems to be a good value, but with credit conditions tight, Jessica must consider whether outside investors would be comfortable with the risks of investing in the midst of a severe commercial real estate downturn. Wildcat is designed to give students exposure to both the quantitative and qualitative aspects of investing in commercial real estate through a private equity structure. Beyond the numbers, the case allows for a discussion of the process of finding suitable real estate investments. The importance of the simultaneous negotiations that Wildcat must have with the seller, the lender, and the outside investor can be emphasized.

By working through the financial models, students will take a given set of assumptions and analyze the cash flows expected to be received by the equity partners of Financial Commons. With a given deal structure, the students can then model the cash flow to both outside equity investors and Wildcat, learning the mechanics of private equity. The model will allow students to investigate how the variations in the underlying assumptions affect returns to the property and to the investors.

Details

Kellogg School of Management Cases, vol. no.
Type: Case Study
ISSN: 2474-6568
Published by: Kellogg School of Management

Keywords

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