Chapter 26Chapter 26

Real Estate Investment Management I:Real Estate Investment Management I:

The Institutional LandscapeThe Institutional Landscape

IntroductionIntroduction

26.1 Real estate investment management26.1 Real estate investment management

26.2 Salient features of real estate investment management26.2 Salient features of real estate investment management

26.3 Responsibilities and functions of the investment manager26.3 Responsibilities and functions of the investment manager

26.4 Private real estate investment products26.4 Private real estate investment products

26.5 The real estate investment management firm26.5 The real estate investment management firm

26.6 Conclusions26.6 Conclusions

Domains of Macro-Level Real Estate Investment Domains of Macro-Level Real Estate Investment Decision Making:Decision Making:

1.1. Strategic Investment Policy & DecisionsStrategic Investment Policy & Decisions

2.2. Tactical Investment Policy & DecisionsTactical Investment Policy & Decisions

3.3. Implementation of Investment PolicyImplementation of Investment Policy

Investors Lacking Sufficient Resources, Specialized Investors Lacking Sufficient Resources, Specialized Expertise, or Legal Authority to Expertise, or Legal Authority to DirectlyDirectly Manage Their Manage Their

Own InvestmentsOwn Investments

The Professional Investment Management The Professional Investment Management IndustryIndustry

CLIENTSCLIENTS

SERVESSERVES

““Fiduciary Relationship”Fiduciary Relationship”

- Investment managers often operate in a Investment managers often operate in a “fiduciary relationship”“fiduciary relationship” with with their investor clients.their investor clients.

- When the relationship is not strictly-speaking When the relationship is not strictly-speaking “fiduciary”“fiduciary” in a legal in a legal sense, it often still has much of the same characteristics…sense, it often still has much of the same characteristics…

Fiduciary RelationshipFiduciary Relationship

• Binds the agent in a role of Binds the agent in a role of trusttrust for the principal party. for the principal party.

• Requires the agent to act in the best interest of the principal party.Requires the agent to act in the best interest of the principal party.

• Requires certain standards of reporting & decision making, e.g.:Requires certain standards of reporting & decision making, e.g.:

• The The “Prudent Investor”“Prudent Investor” Criterion. Criterion.

• Legal fiduciary relationship sets up formal accountability, potential Legal fiduciary relationship sets up formal accountability, potential legal liability.legal liability.

26.2 Salient Features of Real Estate Investment Management26.2 Salient Features of Real Estate Investment Management

Characteristics of Real Estate Requiring Specialized Investment Characteristics of Real Estate Requiring Specialized Investment Expertise:Expertise:• Underlying space markets highly segmented, heterogeneous (Ch.1).Underlying space markets highly segmented, heterogeneous (Ch.1).

• Private asset mkt (search mkt trading of unique, whole assets) Private asset mkt (search mkt trading of unique, whole assets) • Search function (must Search function (must findfind individual assets) individual assets)

• Transaction execution (negotiation, deal structuring, closing)Transaction execution (negotiation, deal structuring, closing)

• Lack of asset mkt informational efficiency (asset price “noise”, inertia) Lack of asset mkt informational efficiency (asset price “noise”, inertia) Unique due diligence & decision issues.Unique due diligence & decision issues.

• Asset operational mgt responsibility & opportunityAsset operational mgt responsibility & opportunity

Operational Mgt Responsibility Important in L.R. Success:Operational Mgt Responsibility Important in L.R. Success:• High transaction costs High transaction costs Long holding periods Long holding periods Long time span over which Long time span over which investor governs operations investor governs operations Can have meaningful impact on investment Can have meaningful impact on investment performance.performance.

• Cash yield orientation of R.E. investment total return (mostly in Cash yield orientation of R.E. investment total return (mostly in yy not not gg) ) Large part of investment performance directly impacted by on-going operations.Large part of investment performance directly impacted by on-going operations.

26.3 Responsibilities & Functions of the Investment Manager26.3 Responsibilities & Functions of the Investment Manager

1)1) Investment advisory services:Investment advisory services:- How should client investHow should client invest in R.E.: Strategy (allocation, styles), in R.E.: Strategy (allocation, styles),

Tactics (timing, reallocation, buy/sell), mgt (vehicles).Tactics (timing, reallocation, buy/sell), mgt (vehicles).

2)2) Asset selection and transaction execution: Asset selection and transaction execution: - ““Acquisitions Dept” (but also dispositions).Acquisitions Dept” (but also dispositions).- Search, Find, Diligence, Negotiate/Structure, Close.Search, Find, Diligence, Negotiate/Structure, Close.

3)3) Investment product development:Investment product development:- Vehicles, Structures, Innovation? (arbitrage?).Vehicles, Structures, Innovation? (arbitrage?).

4)4) Asset management:Asset management:- ““Asset Mgt Dept”Asset Mgt Dept”- Portfolio-level, Responsible for “property mgt”.Portfolio-level, Responsible for “property mgt”.

5)5) Support functions: Communications & Research:Support functions: Communications & Research:- Gather, Analyze info, support investmt. decision making, firm Gather, Analyze info, support investmt. decision making, firm

marketing, client communication.marketing, client communication.

Not all firms provide all five functions.Not all firms provide all five functions.

26.4 Private Real Estate Investment Products26.4 Private Real Estate Investment Products• Open-End Co-mingled Funds (CREFs) or Unit Trusts (PUTs):Open-End Co-mingled Funds (CREFs) or Unit Trusts (PUTs):

- On-going portfolio of properties (no finite life)On-going portfolio of properties (no finite life)- Investors can buy in (cash out) at regular frequent intervals (monthly, quarterly).Investors can buy in (cash out) at regular frequent intervals (monthly, quarterly).- Based on NAV (appraisal-based) of fund.Based on NAV (appraisal-based) of fund.

• Closed-End funds or unit trusts & RELPs:Closed-End funds or unit trusts & RELPs: - Portfolio of properties butPortfolio of properties but- Investors can only buy in a beginning (capitalization phase, then fund is “closed”).Investors can only buy in a beginning (capitalization phase, then fund is “closed”).- Planned liquidation after specified no. of years (but some flexibility).Planned liquidation after specified no. of years (but some flexibility).- “ “RELPs” marketed to individuals in 1980s (for tax shelter).RELPs” marketed to individuals in 1980s (for tax shelter).

• Private REITs: Private REITs: -A way to structure R.E. funds.A way to structure R.E. funds.- Facilitates ownership transfer, potential IPO (“incubator REIT”)Facilitates ownership transfer, potential IPO (“incubator REIT”)- >100 shareholders, 5/fewer>100 shareholders, 5/fewer

• Discretionary Separate Accounts:Discretionary Separate Accounts: - Investor hires mgr to buy and manage properties on investor’s behalf, with the Investor hires mgr to buy and manage properties on investor’s behalf, with the manager having the discretion as to which properties to buy and sell. manager having the discretion as to which properties to buy and sell. - Each separate account is managed on behalf of a single investor, allowing a more Each separate account is managed on behalf of a single investor, allowing a more “custom-tailored” service for larger investors.“custom-tailored” service for larger investors.- For larger investors. For larger investors.

• Non-discretionary Separate AccountsNon-discretionary Separate Accounts- - Even larger investors, requires some in-house R.E. expertise.Even larger investors, requires some in-house R.E. expertise.

26.5 The real estate investment management firm: objectives and strategic 26.5 The real estate investment management firm: objectives and strategic considerationsconsiderations

Clients’Perceptions,

Needs, & Preferences

Cap.MktEnv..& Events

R.E.Space & Asset Mkts

ManagerActions

Client Capital FlowTo/from Manager

Manager Investment

PerformanceFor

Clients

AssetsUnder

Management

Equity Returns&

Incentive Fee RevenueBase Fee Revenue

Value of Management Firm

Industry Associations and Real Estate Information StandardsIndustry Associations and Real Estate Information Standards

•NCREIF (National Council of Real Estate Investment Fiduciaries) NCREIF (National Council of Real Estate Investment Fiduciaries)

•PREA (Pension Real Estate Association) PREA (Pension Real Estate Association)

•NAREIM (National Association of Real Estate Investment Managers)NAREIM (National Association of Real Estate Investment Managers)

•NAREIT (National Association of REITs)NAREIT (National Association of REITs)

•CMSA (Commercial Mortgage Securities Association)CMSA (Commercial Mortgage Securities Association)

AIMRAIMR(Association for Investment Management & Research):(Association for Investment Management & Research):

• CFA designationCFA designation• Investment Performance Reporting Investment Performance Reporting StandardsStandards

Real Estate Information Standards Real Estate Information Standards (REIS)(REIS)