The assessment regime for this module is 100% portfolio based around the scenario below.
As a consultant specialised in real estate finance and investment, you have been approached by an international investor client seeking your advice. The client plans to develop a new Real Estate Investment Trust (REIT) focusing on the UK. Due to the current development around BREXIT, the client wants to seize the opportunity to invest in the UK, while other investors might turn their back on the market.
The investor relies on your expertise with regards to both the structure of the REIT and to what kind of properties they should invest in. The central question is whether the REIT should be focused on a specific location and a specific asset class or if it should be diversified to various locations with various asset types?
The investor is currently considering diversification into real estate rather than other financial options. However, they are aware that investment in real estate is “lumpy” and it is, therefore, harder to diversify. As other REITs operated by the company use financial theories such as Modern Portfolio Theory (MPT) or Capital Asset Pricing Model (CAPM), the client is looking to see a similar approach for this investment. Therefore, the final investment recommendation could be a mixture of real estate, in the form of the structured REIT, and stocks. The planned investment into stocks could be an investment in a general stock index. The goal is it to achieve an ideal market portfolio.
The REIT portfolio should consist of at least 30 properties. As stated the client does not have any preference for a specific asset class or region and will rely on your judgement. Despite the fact, that the financial situation of the client is positive, the total real estate investment should not exceed £500 million. At this moment the client does not disclose how they intend to finance this investment. Therefore, this part will be excluded from your analysis.
As the investor wants to enter the British real estate market, they intend to receive a professional report from your company. The report should be structured into three parts.
The first part should illustrate the general recommended strategy for the proposed REIT. Advantageous and disadvantageous of the different investment strategies should be discussed. You should conclude this part with a final recommendation.
The second part of the report should give a detailed list of properties that you intend to buy. They can either be from CoStar or any comparable data site (i.e. Zoopla). This depends on your intended strategy. You should provide a short overview of the key features of these properties. This should include, the location, the price, the property type and basic assumptions that have helped you to calculate the expected return. Again, the listed properties should not exceed the £ 500 million in total. Besides, the properties should be able to contribute to the ideal market portfolio.
The last part of the report should illustrate the composition of the REIT, as well as the allocation of stocks, you intend to buy. Therefore, a detailed, a well-structured and selfexplanatory MS Excel spreadsheet is mandatory. The spreadsheet should incorporate the calculation of the expected returns for each property and in sum for the proposed REIT. It should further provide the expected return for the stock exposure. The client should also be able to see how you have derived at the ideal market portfolio. These elements should be presented and discussed in the report.
The report should conclude with a professional summary.
To summarise, the report should include the following three elements and should specifically answer the following:
(a) Reasoned justification for the recommended strategy and REIT structure
You should state the advantages and disadvantages of the recommended strategy. Do you suggest a focused or a diversified REIT? If the REIT is to be diversified, is this diversification achieved by mixing either various locations within the UK or is it achieved by combining multiple asset types (i.e. residential and commercial)? Your recommendation should be backed by solid market evidence, in the form of market reports and other supporting material.
(b) Portfolio Recommendations
Investment recommendation for approximately 30 properties, which can support the ideal market portfolio. This section should also include basic assumptions that are relevant for the calculation of the expected return (i.e. rent increase, maintenance costs, running costs).
For simplification reasons, the investor does not need to see a full financial analysis of the investment of the individual transactions. As stated earlier, the financial side of the investment is dealt with by the client. Therefore, it is valid to assume, at this point, that the investments are bought with equity.
The cash flow must be constructed in a separate MS Excel file with supporting commentary and analysis provided within the main report.
As this section deals with the REIT structure, you should further include in the report why you have decided to choose the selected properties. The argument could include a discussion about the locations or the financial aspects. It is recommended to keep this part as brief as possible, as you will not be able to present all 30 properties in much detail. Therefore, it is recommended that you group your arguments to make a strong case for the proposed investments.
(c) Calculation of the expected returns and weighting for the two components (properties and stocks)
This sections should include a detailed calculation of the expected returns and risk appraisals for the properties. Therefore, you need to calculate the required statistics (i.e. Mean, Standard Deviation, Covariance and correlation) on a property and/or portfolio level. This should allow you to calculate the REIT portfolio return and risk.
To be able to calculate the ideal market portfolio you will need to calculate the final weights for the two components of the investment. Therefore, one part of this section should be an explanation of the stock investment.
The MS Excel file should provide the calculation of the necessary measures for the stock investment (see property investment part).
The final recommendation should be discussed in detail in the report, referencing back to the necessary points in the supporting spreadsheet.
Type of assignment: Academic paper writing
Type of assignment: Report
Number of sources: 10
Academic level: Bachelor
Paper format: Harvard
Line spacing: Double
Language style: UK English