Chapter 20 Investments In Real Assets Fundamentals
Description: Chapter 20 Investments In Real Assets Fundamentals of Investments FIN-330 Investments in Real Assets Learning Objectives Understand the advantages and disadvantages of real assets. Explain the portfolio significance of the correlations
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slide1. Chapter 20 Investments In Real Assets Fundamentals of Investments
FIN-330<br>
slide2. Investments in Real Assets Learning Objectives
Understand the advantages and disadvantages of real assets.
Explain the portfolio significance of the correlations between real estate and other assets.
Explain the characteristics of investing in real estate.
Discuss the various forms of financing for real estate investments.
Explain the traditional appeal of precious metals as a form of investments.
Understand the factors that influence the value of collectibles.<br>
slide3. 20-3 Real Assets Real assets are tangible assets that may be:
Seen
Felt
Held
Collected
Real assets during inflationary environments
have at times outperformed financial assets.
Examples: Real Estate, Gold & Silver, Diamonds, coins, stamps, antiques, art<br>
slide4. Wealth Indices of Investments in Equity REITs and Basic Series Index (Year-End 1971= $1) Returns by Asset Class
Small Company Stocks
Equity REITs
Large Company Stocks
Long Term Governments
Treasury Bills 20-4<br>
slide5. Advantages and Disadvantages of Real Assets Advantages
Outperform real assets during inflationary periods
Many believe real assets are good hedges against inflation*
Helps to diversify your investment portfolio
Relatively uncorrelated with financial assets
Disadvantages
Markets tend to be illiquid, charge larger commissions
Do not produce current income (except real estate)
Require insurance and in some cases specialized storage<br>
slide6. Real Estate as an Investment More that 60% of U.S. households own real estate as a home or investment
Brokerage and investment firms are very active
Creating and selling Mortgage-Backed Securities (MBS)
Real Estate Investment Trusts (REITs) dominate
Real Estate takes many forms
Single & Multi-family housing
Condominiums and time shares
Commercial real estate: malls, industrial parks, buildings, hotels and motels<br>
slide7. 20-7 Real Estate as an Investment Investments may include:
Homes
Duplexes
Apartments
Offices
Industrial buildings
Shopping centers
Hotels and motels
Undeveloped land<br>
slide8. Real Estate as an Investment The Tax Reform Act of 1986
Substantially increased wait time to take full advantage of real estate tax deductions
Severely restricted writing-off of paper real estate losses by passive investors against other forms of income
Result: R.E. less attractive to investors and speculators
Other Issues
Various tax reforms blamed for declining economic conditions in late 1980’s and throughout the 1990’s.
Lower than normal rates and loose lending standards led to over-supply and speculation<br>
slide9. Real Estate as an Investment Other Considerations
Historically, only small cap stocks have out performed real estate on a risk-adjusted basis
Real estate also provides steady cash flow
Population growth rates drive demand, which in turn drives increase in supply to meet demand.
The downside is that supply growth frequently exceed rate of population growth
The result is the all too familiar “housing bubble” and its related financial problems.<br>
slide10. Valuation & Forms of Real Estate Ownership Three Major Methods
The Cost Approach: to replace – similar v-v duplicate
Comparative Sales Value: what similar properties sold for
The Income Approach:
How much NOI is generated and at
At what rate is it capitalized?
How does NOI change over time?
Occasionally all three methods are combined<br>
slide11. 20-11 Valuation of Real Estate: The Income Approach Annual net operating income
Capitalization rate (Cap rate) = Valuation The stream of net earnings generated by an income-producing property capitalized as a measure of that property’s worth<br>
slide12. 20-12 Valuation of Real Estate: The Income Approach Future realistic values of annual rentals minus expenses such as property taxes, insurance, … The rate of return required by investors in similar-type investments<br>
slide13. Financing of Real Estate Types if Mortgages
30-Years fixed rate (conventional mortgage, 20% down)
Adjustable Rate (ARM)
Graduated Payment (GPM)
Shared Appreciation (GPM)
Equity Participation (EPM)<br>
slide14. 20-14 Forms of Real Estate Ownership Ownership of real estate can take many forms:
Individual or Regular Partnership
Syndicate or Limited Partnership
Real estate investment trust (REIT)<br>
slide15. 20-15 Forms of Real Estate Ownership Syndicate or Limited Partnership
General partner forms partnership
Unlimited liability
Responsible for managing property
Limited partners purchase participation units
Liability limited to initial investment
No responsibilities – merely investors
Front-end fees to General Partner
5-25%
Blind pool or are specific projects identified?
Public offering
Involves larger total amounts
SEC registration
Private offering
Local in scope
Maximum 35 investors
Secondary (resale) markets exist but dealer spreads and commissions high<br>
slide16. 20-16 Forms of Real Estate Ownership Real Estate Investment Trust
Similar to mutual funds or investment companies
Trade on organized exchanges or over-the-counter
Pool investor funds
No minimum investment other than cost of share
Most liquid type of real estate investment
Large secondary market<br>
slide17. 20-17 Forms of Real Estate Ownership Real Estate Investment Trust (continued)
To qualify, trust must receive 75% of income from real estate
Rents
Interest on mortgage loans
Must distribute at least 95% of income as cash dividend
Equity Trusts
Buy, operate, and sell real estate as investment
Mortgage Trusts
Make long-term loans to real estate investors
Hybrid Trusts
Engage in activities of both equity and mortgage trusts
There are more than 400 REITS in existence<br>
slide18. Gold and Silver Precious metals
Most volatile of real asset investments
Historically, gold and silver:
Move up in value during troubled times
Decline in value during stable & predictable periods
Major price-driving factors: Rumors of wars, political instability, inflation.
Best advertised as “hedges against uncertainty”
Silver: important industrial uses<br>
slide19. Other Collectibles Art
Antiques
Stamps
Chinese ceramics
Rare books
Baseball cards
Precious Gems<br>
slide20. Homework Assignment Questions: 1, 2, 3, 6, 11, 12<br>
FIN-330<br>
slide2. Investments in Real Assets Learning Objectives
Understand the advantages and disadvantages of real assets.
Explain the portfolio significance of the correlations between real estate and other assets.
Explain the characteristics of investing in real estate.
Discuss the various forms of financing for real estate investments.
Explain the traditional appeal of precious metals as a form of investments.
Understand the factors that influence the value of collectibles.<br>
slide3. 20-3 Real Assets Real assets are tangible assets that may be:
Seen
Felt
Held
Collected
Real assets during inflationary environments
have at times outperformed financial assets.
Examples: Real Estate, Gold & Silver, Diamonds, coins, stamps, antiques, art<br>
slide4. Wealth Indices of Investments in Equity REITs and Basic Series Index (Year-End 1971= $1) Returns by Asset Class
Small Company Stocks
Equity REITs
Large Company Stocks
Long Term Governments
Treasury Bills 20-4<br>
slide5. Advantages and Disadvantages of Real Assets Advantages
Outperform real assets during inflationary periods
Many believe real assets are good hedges against inflation*
Helps to diversify your investment portfolio
Relatively uncorrelated with financial assets
Disadvantages
Markets tend to be illiquid, charge larger commissions
Do not produce current income (except real estate)
Require insurance and in some cases specialized storage<br>
slide6. Real Estate as an Investment More that 60% of U.S. households own real estate as a home or investment
Brokerage and investment firms are very active
Creating and selling Mortgage-Backed Securities (MBS)
Real Estate Investment Trusts (REITs) dominate
Real Estate takes many forms
Single & Multi-family housing
Condominiums and time shares
Commercial real estate: malls, industrial parks, buildings, hotels and motels<br>
slide7. 20-7 Real Estate as an Investment Investments may include:
Homes
Duplexes
Apartments
Offices
Industrial buildings
Shopping centers
Hotels and motels
Undeveloped land<br>
slide8. Real Estate as an Investment The Tax Reform Act of 1986
Substantially increased wait time to take full advantage of real estate tax deductions
Severely restricted writing-off of paper real estate losses by passive investors against other forms of income
Result: R.E. less attractive to investors and speculators
Other Issues
Various tax reforms blamed for declining economic conditions in late 1980’s and throughout the 1990’s.
Lower than normal rates and loose lending standards led to over-supply and speculation<br>
slide9. Real Estate as an Investment Other Considerations
Historically, only small cap stocks have out performed real estate on a risk-adjusted basis
Real estate also provides steady cash flow
Population growth rates drive demand, which in turn drives increase in supply to meet demand.
The downside is that supply growth frequently exceed rate of population growth
The result is the all too familiar “housing bubble” and its related financial problems.<br>
slide10. Valuation & Forms of Real Estate Ownership Three Major Methods
The Cost Approach: to replace – similar v-v duplicate
Comparative Sales Value: what similar properties sold for
The Income Approach:
How much NOI is generated and at
At what rate is it capitalized?
How does NOI change over time?
Occasionally all three methods are combined<br>
slide11. 20-11 Valuation of Real Estate: The Income Approach Annual net operating income
Capitalization rate (Cap rate) = Valuation The stream of net earnings generated by an income-producing property capitalized as a measure of that property’s worth<br>
slide12. 20-12 Valuation of Real Estate: The Income Approach Future realistic values of annual rentals minus expenses such as property taxes, insurance, … The rate of return required by investors in similar-type investments<br>
slide13. Financing of Real Estate Types if Mortgages
30-Years fixed rate (conventional mortgage, 20% down)
Adjustable Rate (ARM)
Graduated Payment (GPM)
Shared Appreciation (GPM)
Equity Participation (EPM)<br>
slide14. 20-14 Forms of Real Estate Ownership Ownership of real estate can take many forms:
Individual or Regular Partnership
Syndicate or Limited Partnership
Real estate investment trust (REIT)<br>
slide15. 20-15 Forms of Real Estate Ownership Syndicate or Limited Partnership
General partner forms partnership
Unlimited liability
Responsible for managing property
Limited partners purchase participation units
Liability limited to initial investment
No responsibilities – merely investors
Front-end fees to General Partner
5-25%
Blind pool or are specific projects identified?
Public offering
Involves larger total amounts
SEC registration
Private offering
Local in scope
Maximum 35 investors
Secondary (resale) markets exist but dealer spreads and commissions high<br>
slide16. 20-16 Forms of Real Estate Ownership Real Estate Investment Trust
Similar to mutual funds or investment companies
Trade on organized exchanges or over-the-counter
Pool investor funds
No minimum investment other than cost of share
Most liquid type of real estate investment
Large secondary market<br>
slide17. 20-17 Forms of Real Estate Ownership Real Estate Investment Trust (continued)
To qualify, trust must receive 75% of income from real estate
Rents
Interest on mortgage loans
Must distribute at least 95% of income as cash dividend
Equity Trusts
Buy, operate, and sell real estate as investment
Mortgage Trusts
Make long-term loans to real estate investors
Hybrid Trusts
Engage in activities of both equity and mortgage trusts
There are more than 400 REITS in existence<br>
slide18. Gold and Silver Precious metals
Most volatile of real asset investments
Historically, gold and silver:
Move up in value during troubled times
Decline in value during stable & predictable periods
Major price-driving factors: Rumors of wars, political instability, inflation.
Best advertised as “hedges against uncertainty”
Silver: important industrial uses<br>
slide19. Other Collectibles Art
Antiques
Stamps
Chinese ceramics
Rare books
Baseball cards
Precious Gems<br>
slide20. Homework Assignment Questions: 1, 2, 3, 6, 11, 12<br>