REAL ESTATE FINANCE

REAL ESTATE FINANCE Project 1 You are an investment consultant retained to advise a mid-size university endowment fund about commercial real estate investment. You are to prepare a report which addresses several questions on real estate investment (listed in the next section) raised by the university’s investment committee. Background At its most recent meeting the Investment Committee of XYZ University has decided to investigate allocating a portion of the university’s endowment to commercial real estate. The committee has no previous experience of investment in this area and requires further information before committing investment funds to this sector. In particular, they wish to have your advice on the following questions: Research questions (1) What are the main property types in the commercial real estate market usually considered by institutional investors? (2) If this fund wishes to allocate $200-400m to this sector, is this sufficient to build a diversified portfolio of commercial buildings? (3) Advise the fund on the main advantages and disadvantages of investing in REITs as opposed to buying commercial real estate buildings directly. (4) The endowment fund is already heavily invested in US equities, provide evidence on the average return, variance and correlations of direct real estate with REITs, equities (S&P500, Russell 2000) and bonds (data provided). (5) Provide your assessment of the outlook for the commercial real estate market relative to the other classes. This project is designed to provide experience using data on the performance of the commercial real estate market. A selection of quarterly returns data is provided in the file project_data.xls to assist with the project. Date NCREIF SP500 Russell 2000 REITs 30 Year Bonds 30 Day Treasuries 1979Q1 0.038 0.071 0.169 0.137 0.017 0.024 1979Q2 0.043 0.027 0.067 0.090 0.045 0.025 1979Q3 0.048 0.076 0.111 0.148 -0.019 0.024 1979Q4 0.062 0.002 0.032 -0.045 -0.049 0.030 1980Q1 0.055 -0.040 -0.128 -0.044 -0.136 0.031 1980Q2 0.024 0.133 0.202 0.121 0.237 0.027 1980Q3 0.038 0.113 0.226 0.092 -0.112 0.020 1980Q4 0.053 0.095 0.078 0.063 0.022 0.032 1981Q1 0.030 0.014 0.083 0.056 -0.022 0.034 1981Q2 0.042 -0.022 0.037 0.035 -0.010 0.037 1981Q3 0.032 -0.103 -0.175 -0.107 -0.090 0.038 1981Q4 0.053 0.069 0.102 0.087 0.145 0.032 1982Q1 0.025 -0.071 -0.093 -0.037 0.043 0.028 1982Q2 0.021 -0.005 -0.014 -0.011 0.017 0.032 1982Q3 0.015 0.116 0.105 0.089 0.198 0.024 1982Q4 0.030 0.184 0.265 0.172 0.100 0.019 1983Q1 0.018 0.100 0.174 0.131 0.012 0.020 1983Q2 0.025 0.109 0.203 0.097 -0.002 0.021 1983Q3 0.030 -0.002 -0.049 -0.038 0.003 0.023 1983Q4 0.053 0.005 -0.039 0.095 0.000 0.022 1984Q1 0.034 -0.021 -0.067 0.044 -0.010 0.023 1984Q2 0.032 -0.025 -0.030 -0.006 -0.048 0.024 1984Q3 0.025 0.097 0.055 0.097 0.136 0.025 1984Q4 0.042 0.019 -0.029 0.062 0.081 0.024 1985Q1 0.021 0.091 0.139 0.094 0.017 0.019 1985Q2 0.026 0.076 0.035 0.062 0.135 0.019 1985Q3 0.024 -0.043 -0.044 -0.026 0.011 0.018 1985Q4 0.037 0.174 0.162 0.052 0.153 0.018 1986Q1 0.020 0.142 0.142 0.137 0.221 0.016 1986Q2 0.020 0.058 0.048 0.032 0.031 0.016 1986Q3 0.015 -0.072 -0.122 0.019 -0.024 0.014 1986Q4 0.026 0.053 0.006 -0.003 0.017 0.013 1987Q1 0.018 0.214 0.242 0.096 -0.018 0.014 1987Q2 0.012 0.050 -0.007 0.007 -0.054 0.013 1987Q3 0.021 0.067 0.042 -0.031 -0.104 0.014 1987Q4 0.027 -0.227 -0.291 -0.099 0.110 0.012 1988Q1 0.018 0.058 0.191 0.101 0.037 0.012 1988Q2 0.020 0.067 0.066 0.027 0.009 0.015 1988Q3 0.024 0.004 -0.009 0.012 0.011 0.017 1988Q4 0.031 0.031 -0.006 -0.007 0.018 0.018 1989Q1 0.018 0.070 0.077 0.024 0.010 0.018 1989Q2 0.020 0.089 0.064 0.058 0.141 0.022 1989Q3 0.021 0.107 0.067 0.037 -0.004 0.020 1989Q4 0.018 0.019 -0.049 -0.031 0.049 0.019 1990Q1 0.014 -0.030 -0.022 -0.039 -0.051 0.018 1990Q2 0.015 0.063 0.038 -0.001 0.043 0.019 1990Q3 0.008 -0.139 -0.245 -0.145 -0.036 0.019 1990Q4 -0.014 0.090 0.051 0.032 0.099 0.018 1991Q1 0.001 0.147 0.297 0.227 0.018 0.014 1991Q2 0.000 -0.002 -0.016 0.008 -0.003 0.014 1991Q3 -0.003 0.053 0.082 0.041 0.088 0.014 1991Q4 -0.053 0.084 0.057 0.054 0.063 0.012 1992Q1 0.000 -0.025 0.075 0.007 -0.043 0.009 1992Q2 -0.010 0.018 -0.068 0.026 0.039 0.009 1992Q3 -0.004 0.031 0.029 0.068 0.061 0.008 1992Q4 -0.028 0.053 0.149 0.038 0.012 0.007 1993Q1 0.008 0.043 0.043 0.216 0.068 0.007 1993Q2 -0.002 0.005 0.022 -0.029 0.049 0.007 1993Q3 0.011 0.025 0.087 0.093 0.084 0.007 1993Q4 -0.003 0.024 0.026 -0.074 -0.026 0.007 1994Q1 0.013 -0.038 -0.027 0.034 -0.078 0.007 1994Q2 0.015 0.004 -0.039 0.018 -0.043 0.009 1994Q3 0.015 0.050 0.069 -0.020 -0.015 0.010 1994Q4 0.019 0.000 -0.018 0.000 0.013 0.012 1995Q1 0.021 0.098 0.046 -0.002 0.067 0.012 1995Q2 0.021 0.096 0.094 0.059 0.122 0.015 1995Q3 0.021 0.081 0.099 0.047 0.026 0.014 1995Q4 0.011 0.059 0.022 0.041 0.088 0.014 1996Q1 0.024 0.055 0.051 0.023 -0.083 0.012 1996Q2 0.023 0.045 0.050 0.044 -0.013 0.013 1996Q3 0.026 0.031 0.003 0.065 0.009 0.013 1996Q4 0.026 0.083 0.052 0.188 0.045 0.013 1997Q1 0.023 0.026 -0.052 0.007 -0.046 0.012 1997Q2 0.028 0.175 0.162 0.050 0.058 0.012 1997Q3 0.034 0.076 0.149 0.118 0.064 0.013 1997Q4 0.047 0.030 -0.033 0.017 0.077 0.012 1998Q1 0.041 0.141 0.101 -0.005 0.012 0.013 1998Q2 0.042 0.034 -0.047 -0.046 0.059 0.012 1998Q3 0.035 -0.098 -0.201 -0.105 0.107 0.012 1998Q4 0.036 0.216 0.163 -0.029 -0.013 0.010 1999Q1 0.026 0.049 -0.054 -0.048 -0.071 0.011 1999Q2 0.026 0.069 0.156 0.101 -0.033 0.011 1999Q3 0.028 -0.062 -0.063 -0.080 -0.012 0.011 1999Q4 0.029 0.154 0.184 -0.010 -0.041 0.011 2000Q1 0.024 0.026 0.071 0.024 0.092 0.013 2000Q2 0.031 -0.028 -0.038 0.105 0.006 0.013 2000Q3 0.029 -0.006 0.011 0.076 0.016 0.015 2000Q4 0.033 -0.077 -0.069 0.037 0.076 0.015 2001Q1 0.024 -0.121 -0.065 0.004 -0.003 0.013 2001Q2 0.025 0.059 0.144 0.110 -0.031 0.010 2001Q3 0.016 -0.147 -0.209 -0.026 0.064 0.009 2001Q4 0.007 0.110 0.211 0.050 0.005 0.005 2002Q1 0.015 0.003 0.040 0.083 -0.034 0.004 2002Q2 0.016 -0.135 -0.084 0.050 0.058 0.004 2002Q3 0.018 -0.169 -0.214 -0.090 0.144 0.004 2002Q4 0.017 0.085 0.062 0.004 -0.004 0.004 2003Q1 0.019 -0.032 -0.045 0.007 0.006 0.003 2003Q2 0.021 0.155 0.234 0.131 0.051 0.003 2003Q3 0.020 0.027 0.091 0.095 -0.034 0.002 2003Q4 0.028 0.120 0.145 0.100 -0.015 0.002 2004Q1 0.026 0.018 0.063 0.120 0.056 0.002 2004Q2 0.031 0.017 0.005 -0.058 -0.059 0.002 2004Q3 0.034 -0.019 -0.029 0.082 0.070 0.003 2004Q4 0.047 0.092 0.141 0.152 0.022 0.004 2005Q1 0.035 -0.020 -0.053 -0.071 0.021 0.005 2005Q2 0.053 0.014 0.043 0.144 0.097 0.007 2005Q3 0.044 0.036 0.047 0.038 -0.043 0.008 2005Q4 0.054 0.022 0.011 0.015 0.016 0.009 2006Q1 0.036 0.042 0.139 0.147 -0.059 0.010 2006Q2 0.040 -0.015 -0.050 -0.016 -0.033 0.012 2006Q3 0.035 0.057 0.004 0.093 0.081 0.012 2006Q4 0.045 0.066 0.089 0.095 0.004 0.012 2007Q1 0.036 0.007 0.019 0.035 0.003 0.012 2007Q2 0.046 0.062 0.044 -0.090 -0.031 0.012 2007Q3 0.036 0.020 -0.031 0.026 0.057 0.012 2007Q4 0.032 -0.031 -0.046 -0.127 0.073 0.010 2008Q1 0.016 -0.094 -0.099 0.014 0.040 0.006 2008Q2 0.006 -0.026 0.006 -0.049 -0.027 0.004 2008Q3 -0.002 -0.079 -0.011 0.056 0.047 0.004 2008Q4 -0.083 -0.219 -0.261 -0.388 0.337 0.001 2009Q1 -0.073 -0.106 -0.150 -0.319 -0.132 0.000 2009Q2 -0.052 0.157 0.207 0.288 -0.122 0.000 2009Q3 -0.033 0.152 0.193 0.333 0.059 0.000 2009Q4 -0.021 0.061 0.039 0.094 -0.083 0.000 2010Q1 0.008 0.054 0.089 0.100 -0.001 0.000 2010Q2 0.033 -0.115 -0.099 -0.041 0.156 0.000 2010Q3 0.039 0.114 0.113 0.128 0.043 0.000 2010Q4 0.046 0.108 0.163 0.074 -0.097 0.000 2011Q1 0.034 0.057 0.079 0.075 -0.018 0.000 2011Q2 0.039 0.001 -0.016 0.029 0.034 0.000 2011Q3 0.033 -0.138 -0.219 -0.151 0.310 0.000 2011Q4 0.030 0.116 0.155 0.153 0.017 0.000 2012Q1 0.026 0.126 0.124 0.105 -0.074 0.000 2012Q2 0.027 -0.027 -0.035 0.040 0.128 0.000 2012Q3 0.023 0.063 0.053 0.010 -0.004 0.000 2012Q4 0.025 -0.005 0.019 0.031 -0.017 0.000 2013Q1 0.026 0.106 0.124 0.081 -0.025 0.000 2013Q2 0.029 0.029 0.031 -0.021 -0.064 0.000 2013Q3 0.026 0.052 0.102 -0.026 -0.031 0.000 2013Q4 0.025 0.106 0.087 -0.002 -0.041 0.000 2014Q1 0.027 0.017 0.011 0.085 0.087 0.000 2014Q2 0.029 0.051 0.020 0.071 0.048 0.000 2014Q3 0.026 0.011 -0.074 -0.025 0.040 0.000 2014Q4 0.030 0.051 0.097 0.129 0.097 0.000