Real Estate Investment Performance and Portfolio Considerations This chapter introduces the measurement of investment performance and the basic elements of portfolio theory. We will also deal with the question of whether real estate investments tend to provide diversification benefits to portfolios that have traditionally consisted of government securities, common stocks, and corporate bonds. We stress that the nature of real estate investment return data is very limited and may not be representative of a broad measure of real estate returns. Further, some of the data are based on a group of properties owned by investment advisors. In this case, an index is calculated on reported net operating income and appraised property values with very few actual transaction prices. Results from the portfolio simulations to be conducted and reported in the last part of the chapter indicate that there appeared to be significant gains available from portfolio diversification into real estate during the period 1985–2009 based on these limited data sets. In all simulations, real estate increased portfolio efficiency. Of course, these results are based on historical data from a limited sample of real estate investments and may not be indicative of future results or apply generally to all real estate investments.
Real Estate Investment Trusts (REITs) This chapter discusses the history and current operations of real estate investment trusts (REITs). The resurgence of REITs in the early 1990s is another indication of the extent that real estate has become "securitized." Compared with traditional methods of investing, real estate–backed securities appear to be gaining in importance because of their marketability, the public accountability of management, and numerous other reasons. REITs, which provide a structure similar to that of mutual funds for common stock investors, allow investors to participate in a portfolio of properties that may be geographically diversified and professionally managed. Further, REITs are usually tax-exempt and must pass through as dividends to investors most of the cash flow produced from managing the portfolio. Accounting practices for depreciation and amortization and the resultant effects on net income may allow a portion of the tax on REIT dividends to be deferred. Today, the market value of REITs exceeds $190 billion, and many of the premier real estate operators in the United States are operating within the REIT format, so market research and analysis for individual REITs and the industry are widely available from investment banks and other investment firms.
Structuring Real Estate Investments: Organizational Forms and Joint Ventures Large real estate investments often require several investors to pool their capital in order to have sufficient equity to acquire the property. Different investors may bring different amounts of capital and expertise to the table. Therefore, an ownership agreement that takes this into consideration must be structured. This chapter discusses various ways that more than one investor can jointly acquire or develop real estate. The economics of these joint ventures are discussed, along with the legal ownership forms that can be used, such as general partnerships, limited partnerships, and corporations. Although the focus of this chapter is on limited partnerships, the same concepts apply to simpler partnerships such as a general partnership that does not have limited partners. Finally, as you will see in this chapter, most REITs formed in the past 10 years were structured such that the REIT is the general partner in a limited partnership that owns the properties. The limited partners are investors who exchanged their partnership interest in a syndication for a partnership interest in the limited partnership owned by the REIT. This will be discussed further in Chapter 21.
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