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Lecture 16
Institutional Investments
Pension Funds– Many pension funds have committed 5% or more to the real
estate sector
– 2004: U.S. Domestic pension funds held over $140 billion in commercial property equity
Real Estate Investment Trusts (REITS)
Institutional Investments
Direct Real Estate Investing vs. Stock and Bond Investing
Property assets are relatively illiquid and trade in a multitude of local private markets rather than in centralized public exchanges
Real estate assets are geographically fixed and must serve space markets that are geographically segmented
Property assets trade in “whole assets” rather than in small shares
Initial Problems in Direct Real Estate Investment
Large sums of money required to purchase assets
Need for property management and asset management
Illiquidity of real estate investments– Longer time required to sell– More expensive to sell
Lecture 16
Evolution of
Real Estate Products for Institutional Investors
Evolution of Real Estate Products for Institutional Investors
1970’s: Commingled Real Estate Fund (CREF)
– Similar to Limited Partnerships– Funds from several pension funds pooled to purchase a
diversified portfolio of commercial properties– Investment Advisor responsible for asset management and
investment decisions– Pension fund investors entitled to their pro-rata share of
income and proceeds– Investors could buy into or cash out any time on the basis of
a current appraised value of the CREF shares
Evolution of Real Estate Products for Institutional Investors
Late 1980’s: Problems in Real Estate Markets
– S & L deregulations, tax-induced investing, and other sources of money in the market
– Widespread dissatisfaction among pension fund clients, pared with collapse in property markets, created shake-out and consolidation in real estate investment advisory industry through mid-1990’s.
Evolution of Real Estate Products for Institutional Investors
1990’s: Serious Interest in Publicly-Traded Real Estate Securities
– Real Estate Investment Trusts (REITs)– Commercial Mortgage-Backed Securities (CMBS)– Pension funds still rely on REIT and CMBS shares
for their real estate allocations.– Upturn in commercial property markets offered
exciting new prospects and opportunities.
Public vs. Private Asset Markets
Liquidity
Informational Efficiency
Lecture 16
REIT Performance
REIT Growth Since 1989
REIT Growth Since 1989
Before 1992:
•Micro-Cap in Size
•Low Liquidity
•Highly Leveraged
•Variable-Rate Debt
•Advised REITs with little ownership
•Little property-type focus
Since 1992:
•Small to mid-cap
•Good Liquidity
•Lower leverage – 30% - 60%
•Cheaper debt, some fixed
•Better-aligned interests and ownership
•More property focus
REIT Ownership
(as an approximate percentage of the value of all institutional holdings of the same property type)
Malls: 32%Hotels: 17%Retail: 13%Apartments: 7%Office: 6%Warehouses: 5%
Lecture 16
REIT Regulation
REIT Regulation
REITs cannot be closely-held corporations– No five or fewer individuals may own more than 50% of the
REIT stock; must have at least 100 shareholders
75% or more of the REIT’s total assets must be real estate, mortgages, cash, or federal government securities, and 75% or more of the REIT’s yearly gross income must be derived directly or indirectly from real estate property
REIT Regulation
90% or more of the REIT’s annual taxable income must be distributed to shareholders as annual dividends
REITs must derive their income from primarily passive sources like rents and mortgage interest, and not from short-term trading and the like.
Lecture 16
Industry Associations
Industry Associations
Pension Real Estate Association (PREA) National Council of Real Estate Investment
Fiduciaries (NCREIF) Association for Investment Management and
Research (AIMR) National Association of Real Estate
Investment Trusts (NAREIT) Real Estate Research Institute (RERI)