Investment Styles and Style Boxes in Equity Real Estate: Can the Emerging Model Succeed in Classifying Real Estate Alternatives?

Journal of Real Estate Portfolio Management, Jan-Apr 2005 by Kaiser, Ronald W

In contrast, the public equity portfolio manager normally can do nothing to affect the value of any investment holdings.

Performance Attribution Analysis: Can It Account for "Value-Added?"

As currently applied by the industry, performance attribution seeks to determine where an advisor has added (or lost) value in terms of asset selection-relative weights versus NCREIF by property type and by location. The superiority (or inferiority) of return is then attributed to selection. This would comprise the entire evaluation process for public equity attribution analysis. If this same approach were applied to real estate manager portfolios, one would have to assume that management's activities somehow average out-that there is no basis for distinguishing talent in the area of property control activities. However, in the author's experience, particularly where there is substantial redevelopment of the property, the return attributable to value-added activities can swamp the effect of selection activities by more than 1000 basis points in a redevelopment/releasing year. This is potentially an area of fruitful future research: sorting out the selection effects from the management control effects on portfolio returns.

Determining Style Boxes in Real Estate: The Reverse of the Public Securities Approach

In the world of stocks and bonds, one first sets the style box boundaries, and lets return and risk be the dependent variables. Based on discussions with style box designers in real estate, it appears that the process is reversed: they want to use expected (and/or historic) risk and return as the guide to defining the style box and then try to assign various property, financial and activity parameters to each box. They seem to want to divide the opportunity set into low risk/return, moderate risk/return and high risk/return groups. The style box boundary definition parameters then become the dependent variable. The two approaches to style boxes are summarized in Exhibit 4.

Survey Results

At the current stage of evolution in the design and use of real estate style boxes, there is little specific agreement on either the size of the style box (risk/ return) or the specific property or activity attributes that are required to fulfill the risk/return objectives. Exhibits 6A, B and C highlight the findings of the limited survey. The style boxes seem not to be clearly defined boxes, but a fuzzy set of boundaries on the risk/return spectrum.

Using expected returns, as well as the income versus appreciation share of the return, appears to be the most common and explicit way to define the boxes-NCREIF's white paper uses this as the "definition" and then sorts attributes as the way to understand what goes where. Some consultants use absolute targets: "core 8-10%, core-plus 10-12%, value-added 12-14%, and opportunistic 14 %"; and others use a relative yardstick: NPI 100, NPI 200 and NPI 500 basis points. Whether returns were based on IRRs or time-weighted or were net of fees was never particularly specified.