Research

Real Estate

Traditionally, institutional investors have primarily made direct investments in real estate.  Given the complexities and illiquidity of the asset class, institutional investors realized the benefits of specialized investment managers with expertise in real estate operations and particular market segments.  As real estate funds emerged to meet the need of investors, the market developed into distinct strategy types (core funds, value-added funds and opportunistic funds). IPC research improves our understanding of this complexity.

Research Papers - Real Estate

Commercial Real Estate Data: Towards Parity with Other Asset Classes

by CREDA Working Group
January, 2016

Commercial real estate (CRE) lags behind other major asset classes in terms of data availability and transparency. Limited access to usable data serves as a constraint on academic research and the subsequent development of practitioner tools. This paper summarizes the work of the Commercial Real Estate Data Alliance (CREDA) working group, investigating some of the currently available CRE data sources and focusing primarily on U.S. property-level data. The document identifies some of the challenges to the creation of a comprehensive historical dataset and offers some suggestions on how such challenges might be overcome. Also discussed are some concurrent initiatives aiming to address similar issues with CRE research data. This is intended to be a “living document” which will be updated as our understanding evolves.

Class Differences in Real Estate Private Equity Fund Performance

by Lynn M. Fisher and David J. Hartzell
Draft December 2014

Real estate private equity (REPE) funds are often differentiated by risk class: core, value-added, or opportunistic. Fund class is used by investors and managers to allocate funds and to describe investment policies. In this paper, we use REPE fund cash flow data from Burgiss that allow us to calculate a variety of performance metrics. For a subset of the data, we also observe characteristics of underlying fund holdings. Despite evidence that Value-Added and Opportunistic funds differ in investment composition, we show that class does not do a good job of predicting differences in performance. Unsurprisingly, greater investment in development (as assessed ex post), predicts poor performance for funds raised just before the Great Recession.

Draft -- Please do not cite

Real Estate Private Equity Performance: A New Look

by Lynn M. Fisher and David J. Hartzell
July 2013

In this paper, we introduce a new and novel database provided by Burgiss that consists of several hundred Real Estate Private Equity (REPE) funds. The data include fund cash flows paid in by, and distributed to, limited partners (LPs), as well as reported Net Asset Values (NAVs). In particular, we describe the cash flows of 456 U.S.-dollar denominated funds and their performance from 1982 - 2011. We find that on average 90% of committed capital is called in the first four years of fund life and it takes until year 8 of the typical REPE fund for an LP to break even (that is, to receive distributions equal to her paid-in capital). On average, funds in each vintage year until 2004 met or exceeded returns to a similar investment in the S&P 500, but not in more recent vintages. As compared to alternative real estate benchmarks, REPE funds, on average, underperformed the NCREIF Property Index and the FTSE NAREIT U.S. All-Equity REIT Index. Over the entire sample period, only 27 funds have returned more than 2x the capital paid-in by LPs, while more than one-third is valued below the level of paid-in capital at the end of 2011.

Asset-level risk and return in real estate investments

by Jacob Sagi
Working Paper 2015

Relatively little is known in the academic literature about the idiosyncratic returns of individual real estate investments, though quite a few commercial properties command prices commensu- rate with the market values of small publicly traded companies. I use purchase and sale data from the National Council of Real Estate Investment Fiduciaries (NCREIF) to compute holding period price-appreciation returns for commercial properties. In stark contrast with liquid asset returns, idiosyncratic drift and volatility estimates diverge as the holding period shrinks. This puzzling phenomenon survives a variety of controls for vintage effects, systematic risk hetero- geneity, and sample selection biases. I derive an equilibrium search-based illiquid asset pricing model which, when calibrated, fits the data very well. Thus a structural model of illiquidity seems crucial to a descriptive theory of real estate investment returns. These insights can be extended to other illiquid asset classes such as private equity, mergers and acquisitions, large whole loans, and other real assets. The model can also be used to price derivatives such as debt claims.

Real Estate as a Luxury Good: Non-Resident Demand and Property Prices in Paris

by Dragana Cvijanovic and Christophe Spaenjers
Working Paper 2014

This paper examines how the international demand for luxury consumption affects the real estate market in global hotspots. Using a unique data set of housing transactions in Paris, we find that (i) non-resident foreigners crowd out residents in highly desirable areas of the city, especially in good times; (ii) these non-residents overpay and realize lower capital gains when reselling; and (iii) purchases by non-resident foreigners have a causal positive effect on price levels. Our results illustrate the importance of foreign buyers — and their tastes — in attractive locations worldwide.

Within-Bank Transmission of Real Estate Shocks

by Dragana Cvijanovic, Vicente Cunat, and Kathy Yuan
Working Paper 2014

We estimate the reaction of banks to capital losses induced by reductions in real estate prices. We consider banks as portfolios of assets in different locations and exploit regional variation in real estate in order to control for local demand shocks and bank-location specific factors. The results show that banks recognize substantial capital losses associated with real estate prices. They also adjust their lending and financing policies. They reduce lending across all types of loans, indicating contagion both across geographical locations and business lines. Large-affected banks issue more equity and all banks use their available liquidity to accommodate the shock. Finally, we find evidence of more affected banks rolling over and failing to liquidate problematic loans.

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