S TRUCTURE AND I NVESTMENT IN R EAL A SSETS Jon Wiley Clemson University Peter Chinloy American University Houses amp Apartments Substitutes in production amp consumption Starkly different investment behavior ID: 585011
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CAPITAL STRUCTURE AND INVESTMENT IN REAL ASSETS
Jon Wiley
Clemson University
Peter Chinloy
American UniversitySlide2
Houses & ApartmentsSubstitutes in production & consumptionStarkly different investment behaviorInvestment in houses is highly volatileApartment investment has remained stable since 1990Possible explanation:
Differences in contract design & financial variablesSlide3
US Housing StartsLeamer (2007) Investment in housing leads GDP fluctuations Accounts for more than 60% of GDP volatility Trend GDP growth is 3% plus a term related to residential investmentSlide4
Capital StructuresSingle-familyHouses:Times when underwriting spigots on:Nonrecourse debt Fully prepayableLow default costs
Highly leveraged + a call option
Traditional pecking order
(Maximize debt; equity is residual)Slide5
Capital StructuresMultifamilyApartments:Owned by investorsPolicy not targeted on-offLoan instruments differLower LTVSome recourse
Not fully
prepayable
(without penalty)
Reverse pecking order
High equity; debt is the residualSlide6
Modified User CostUser cost = Interest rate – Capital gainsq = Market value / Replacement costWith constraints and illiquidity, financial variables impact investmentAlternative is the yield-price ratio
Treated as a function of:
Capital gains
Interest rates
Term structure
Capital structureSlide7
ApproachIf capital structure varies, then it alone can affect different performance – even if assets are similarDifferences caused by the capital structure should travel through yield-price ratioPrice = f {
D
,
L
, Financial variables}
Rent
=
f
{
Vacancy
(
L
),
D
, Financial variables}
R/P
ratio =
f
(
Capital gains
, Financial variables)
Investment
=
f
(
D
,
R/P
)Slide8
Summary of DataSlide9
Rent-Price RatioSlide10
Residential InvestmentSlide11
ResultsCapital Structure: Rents & PricesYield-price ratio: Increasing in capital gainsDecreasing in interest ratesIncreasing with the use of leverageSlide12
ResultsInvestment: Houses & ApartmentsInvestment in Houses: Triggered by the yield-price ratioIncreasing with the debt ratio (LTV)Investment in Apartments:
Unaffected by capital structuresSlide13
Determinants of LTVSlide14
Values for Housing StartsSlide15
Vacancy-RentSlide16
Investment: Actual ValuesSlide17
Investment: First DifferenceSlide18
Financial VariablesVariable Source12-month LIBOR Wall Street JournalTerm structure Federal ReserveCapital gains Census values S&P500 returns Standard & Poor’s LTVs for Houses FHFA
LTVs for Apartments* Residential Finance Survey (2001)
LTVs for Apartments** Bloomberg CMBS
*1990-1999
**2000-2007Slide19
MSA Data25 MSAs from 1990-2007 Variable SourceEmployment (D) BLSIncome (
D
) BEA
Undevelopable
(
L
)
Saiz
(2010)
WRI
(
L
) GSS (2008)
Housing starts HUD
Values (authorized) Census
Rents BLS
Vacancies Census