Global Real Estate Investment Trusts Parker_ffirs.indd iParker_ffirs.indd i 10/10/2011 7:27:19 PM10/10/2011 7:27:19 PM To my wife and our twin teenagers. May the future with Susan, Elliot and Victoria recompense for that foregone. Parker_ffirs.indd iiParker_ffirs.indd ii 10/10/2011 7:27:19 PM10/10/2011 7:27:19 PM Global Real Estate Investment Trusts People, Process and Management David Parker Professor of Property University of South Australia A John Wiley & Sons, Ltd., Publication Parker_ffirs.indd iiiParker_ffirs.indd iii 10/10/2011 7:27:19 PM10/10/2011 7:27:19 PM This edition  rst published 2011 © 2011 David Parker Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing programme has been merged with Wiley’s global Scienti c, Technical, and Medical business to form Wiley-Blackwell. Registered Office John Wiley & Sons, Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO198SQ, UK Editorial Offices 9600 Garsington Road, Oxford, OX4 2DQ, UK The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK 2121 State Avenue, Ames, Iowa 50014-8300, USA For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell. The right of the author to be identi ed as the author of this work has been asserted inaccordance with the UK Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard tothe subject matter covered. It is sold on the understanding that the publisher is notengaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. First edition published by Blackwell Publishing 2008 Library of Congress Cataloging-in-Publication Data Parker, David, professor. Global real estate investment trusts : people, process and management / David Parker. – 1st ed. p. cm. Includes bibliographical references and index. ISBN 978-1-4051-8722-0 (hardback) 1. Real estate investment trusts–Management. I. Title. HG5095.P37 2012 332.63′247068–dc23 2011035003 A catalogue record for this book is available from the British Library. This book is published in the following electronic formats: ePDF 9781444398793; ePub 9781444398809; oBook [ISBN] Set in 10/13pt Trump Mediaeval by SPi Publisher Services, Pondicherry, India 1 2011 Parker_ffirs.indd ivParker_ffirs.indd iv 10/10/2011 7:27:19 PM10/10/2011 7:27:19 PM Contents About the Author xi Foreword xiii Preface xv Acknowledgments xvii Introduction xix 1 Envisioning 1 1.1 People and process 4 1.1.1 People 4 1.1.2 Process 7 1.1.3 People and process 11 1.2 REITs: an introduction 11 1.2.1 Transparency in governance 12 1.2.2 REIT models 13 1.2.3 REITs: summary 13 1.3 Preparing Phase 13 1.4 Envisioning Stage 14 1.5 People 16 1.5.1 Governing Entity 17 1.5.2 Chief Executive Officer (CEO) 19 1.5.3 Chief Financial Officer (CFO) 21 1.5.4 Support Teams 22 1.5.5 Fund Management Team 23 1.5.6 People 24 1.6 Vision 24 1.7 Style 26 1.7.1 Active vs. passive 27 1.7.2 Top down vs. bottom up 28 1.7.3 Value vs. growth 28 1.7.4 Core, value added and opportunistic 29 1.7.5 Style 30 1.8 Goals 30 1.9 Strategic Plan 32 1.9.1 Strategic models 32 1.9.2 Strategic planning process 33 1.9.3 Strategic Plan 35 1.10 Objectives 35 1.11 Super REIT 36 1.12 Summary 38 Parker_ftoc.indd vParker_ftoc.indd v 10/10/2011 7:26:59 PM10/10/2011 7:26:59 PM vi Contents 1.13 Key points 39 References 41 2 Planning 43 2.1 People 44 2.1.1 Portfolio Management Team 44 2.1.2 Strategy Team 46 2.1.3 Research Team 46 2.2 Property Portfolio Strategy 48 2.2.1 Targeting risk-return performance 48 2.2.2 Properties vs. portfolios 51 2.2.3 New vs. existing portfolios 53 2.2.4 Iterative process 55 2.2.5 Property Portfolio Strategy 56 2.3 Strategic Asset Allocation 59 2.3.1 Modern portfolio theory 61 2.3.2 Capital market theory and the Capital Asset Pricing Model 65 2.3.3 Strategic Asset Allocation 68 2.4 Tactical Asset Allocation 69 2.4.1 Spatial based approaches 71 2.4.2 Style based approaches 72 2.4.3 Other approaches 73 2.4.4 Tactical Asset Allocation 75 2.5 Stock Selection 75 2.5.1 Generic criteria 76 2.5.2 Speci c criteria 77 2.5.3 Stock Selection 80 2.6 Asset Identi cation 80 2.6.1 Market efficiency 81 2.6.2 Information processing 84 2.6.3 Asset Identi cation 91 2.7 Super REIT 91 2.8 Preparing Phase 93 2.9 Summary 93 2.10 Key points 95 References 96 3 Dealing 99 3.1 People 101 3.1.1 Capital Transactions Team 101 3.2 Preliminary Negotiation 102 Parker_ftoc.indd viParker_ftoc.indd vi 10/10/2011 7:26:59 PM10/10/2011 7:26:59 PM Contents vii 3.3 Preliminary Analysis 104 3.3.1 Qualitative Preliminary Analysis 105 3.3.2 Quantitative Preliminary Analysis 105 3.3.3 Preliminary Analysis 109 3.4 Structuring 109 3.4.1 Structuring the commercial transaction 110 3.4.2 Structuring the funding transaction 112 3.4.3 Documenting the proposed transaction 114 3.5 Advanced Financial Analysis 115 3.5.1 Target rate of return 117 3.5.2 Theoretical basis of mis-pricing 122 3.5.3 Pricing models 124 3.5.4 Decision rule 130 3.5.5 Advanced Financial Analysis 133 3.6 Portfolio Impact Assessment 133 3.6.1 Risk-return balance 133 3.6.2 Portfolio metrics 134 3.6.3 Short form documentation 135 3.6.4 Portfolio Impact Assessment Step 135 3.7 Super REIT 135 3.7.1 Preliminary Negotiation 136 3.7.2 Preliminary Analysis 137 3.7.3 Structuring 140 3.7.4 Advanced Financial Analysis 140 3.7.5 Portfolio Impact Assessment 152 3.7.6 Outcomes of implementing the Dealing Stage 153 3.8 Summary 155 3.9 Key points 156 References 158 4 Executing 159 4.1 People 161 4.1.1 Investor Interface Team 162 4.2 Governance Decision 163 4.2.1 Delegation of authority 163 4.2.2 Information required by decision maker 164 4.2.3 Governance Decision 169 4.3 Transaction Closure 169 4.3.1 Commercial Transaction Closure 169 4.3.2 Funding Transaction Closure 170 4.3.3 Transaction Closure 170 Parker_ftoc.indd viiParker_ftoc.indd vii 10/10/2011 7:26:59 PM10/10/2011 7:26:59 PM viii Contents 4.4 Documentation 171 4.4.1 Negotiation of Documentation 171 4.4.2 Sign-offs 174 4.4.3 Execution and exchange 175 4.4.4 Documentation 175 4.5 Due Diligence 176 4.5.1 Fiduciary duty 177 4.5.2 Operationalising Due Diligence 177 4.5.3 Due Diligence 180 4.6 Independent Appraisal 180 4.6.1 Requirement for appraisal 181 4.6.2 Appraisal issues 182 4.6.3 Appraiser appointment 185 4.6.4 Appraiser instruction 186 4.6.5 Appraisal report 187 4.6.6 Independent Appraisal 188 4.7 Transacting Phase 188 4.8 Super REIT 189 4.8.1 Governance Decision 190 4.8.2 Transaction Closure 190 4.8.3 Documentation 190 4.8.4 Due Diligence 191 4.8.5 Independent Appraisal 191 4.8.6 Outcomes of implementing the Executing Stage 192 4.9 Summary 192 4.10 Key points 193 References 195 5 Watching 197 5.1 People 199 5.1.1 Compliance and Risk Management Team 200 5.2 Settlement 201 5.2.1 Settlement check list 202 5.2.2 Asset management plan 203 5.2.3 Settlement 203 5.3 Post Audit 204 5.3.1 Timing 204 5.3.2 Basis 205 5.3.3 Learning process 205 5.3.4 Post Audit 206 5.4 Performance Monitoring 207 5.4.1 Planning 207 Parker_ftoc.indd viiiParker_ftoc.indd viii 10/10/2011 7:26:59 PM10/10/2011 7:26:59 PM Contents ix 5.4.2 Comparative analysis 208 5.4.3 Reporting 210 5.4.4 Performance Monitoring 210 5.5 Performance Measurement 210 5.5.1 Return measurement 212 5.5.2 Performance relative to an index or benchmark 227 5.5.3 Risk measurement 230 5.5.4 Performance Measurement 232 5.6 Portfolio Analysis 233 5.6.1 Recurrent analysis 234 5.6.2 Attribution analysis 234 5.6.3 Recursion 238 5.6.4 Portfolio Analysis 239 5.7 Super REIT 240 5.7.1 Settlement 241 5.7.2 Post Audit 241 5.7.3 Performance Monitoring 241 5.7.4 Performance Measurement 242 5.7.5 Portfolio Analysis 242 5.7.6 Outcomes of implementing the Watching Stage 242 5.8 Summary 243 5.9 Key points 244 References 245 6 Optimising 247 6.1 People 250 6.1.1 Asset Management Team 250 6.1.2 Property Management Team 251 6.1.3 Facilities Management Team 252 6.2 Asset Management 253 6.2.1 Proactive components 254 6.2.2 Reactive components 258 6.2.3 Asset Management 259 6.3 Property and Facilities Management 260 6.3.1 Property Management 260 6.3.2 Facilities Management 261 6.3.3 Outsourcing Property and Facilities Management 262 6.4 Transformation 263 6.4.1 Refurbishment Transformation 263 6.4.2 Redevelopment Transformation 265 6.4.3 Mandatory lease related Transformation 267 6.4.4 Optional lease related Transformation 267 Parker_ftoc.indd ixParker_ftoc.indd ix 10/10/2011 7:26:59 PM10/10/2011 7:26:59 PM x Contents 6.4.5 Transformation 268 6.5 Portfolio Rebalancing 269 6.5.1 Proactive components 269 6.5.2 Reactive components 271 6.5.3 Portfolio Rebalancing 272 6.6 Disposal 272 6.6.1 Disposal process 273 6.6.2 Disposal method 274 6.6.3 Disposal Step 275 6.7 Observing Phase 276 6.8 Super REIT 276 6.8.1 Asset Management 277 6.8.2 Property Management and Facilities Management 278 6.8.3 Transformation 278 6.8.4 Portfolio Rebalancing 278 6.8.5 Disposal 279 6.8.6 Outcome of implementing the Optimising Stage 279 6.9 Summary 280 6.10 REIT real estate investment decision making process 281 6.11 Key points 282 References 283 Glossary 285 Index 291 Parker_ftoc.indd xParker_ftoc.indd x 10/10/2011 7:26:59 PM10/10/2011 7:26:59 PM [...]... international business; and the significance of the Phases, Stages and Steps comprising the REIT real estate investment decision making process 1.1 People and process As the title Global Real Estate Investment Trusts: People, Process and Management indicates, this book focuses on both the people and the process involved in real estate investment decision making with the consideration of people intentionally... sector and geography REITs may focus on being real estate owners and/ or real estate developers and/ or real estate fund managers and may be internally managed or externally managed Similarly, REITs may be sector specific and provide real estate investment opportunities in established sectors such as office, retail and industrial real estate as well as emerging sectors such as healthcare, self-storage and. .. real estate investment trust, or REIT, converts $1 of unitholder capital into $1 of investment real estate Focusing equally on the people and the process, the contributions of the key participants in the real estate investment decision making process are described and analysed with a particular emphasis on both the overlap between their roles and their interaction The process of real estate investment. .. faith, and gut feel.’ (Pyhrr et al., 1989), so underlining the vital connection between people and process Parker_c01.indd 10 10/11/2011 4:54:52 PM 1.1.3 People and process This book seeks to explain the real estate investment decision making process by which a real estate investment trust, or REIT, converts $1 of unitholder capital into $1 of investment real estate While focusing equally on the people and. .. as a real estate investment product Extensive research over the last 25 years has shown that real estate investment is not necessarily different to other forms of investment While many aspects of real estate investment can be explained by the application of theories and principles developed for other forms of investment, some aspects of real estate investment remain specific to the real estate sector...About the Author David Parker is an internationally recognised real estate industry expert and highly regarded real estate academic, being a director and adviser to real estate investment groups including listed real estate investment trusts, unlisted funds and private real estate businesses (www.davidparker.com.au) Professor Parker is currently the inaugural Professor... explicit and above all repeatable investment decision making process Based upon original up to date research, this book seeks to explain not only how REIT real estate investment decision making should be undertaken in practice, but also how it is undertaken and the real estate theory, capital market theory and finance theory underlying each part of the real estate investment decision making process. .. sequentially and not omit a step, such as the Portfolio Impact Step, as this will result in important data then being missing from the real estate investment decision making process and a potentially suboptimal decision then resulting which may not be in unitholders’ best interests Parker_c01.indd 9 10/11/2011 4:54:52 PM 10 Global Real Estate Investment Trusts To illustrate the REIT real estate investment. .. robust and practically relevant up to date guide to the real estate investment decision making process for REITs As such, this book fuses not only how REITs should undertake real estate investment decision making, based on how they do undertake it, but also why each part of the decision making process is important Presenting new insights, this book breaks the REIT real estate investment decision making process. .. that underpins real estate investment management While the real estate investment decision making process draws on a range of tools, such as the Capital Asset Pricing Model, the role of intuition and judgment remains vital Spreadsheets, sensitivity analysis and scenarios all have an important role to play in real estate investment decision making but need to be balanced with the intuition and judgment . internationally recognised real estate industry expert and highly regarded real estate academic, being a director and adviser to real estate investment groups including listed real estate investment trusts,. to REITs and real estate funds, having developed Clarity ® , a proprietorial research-based real estate investment decision making process linking corporate vision to individual real estate assets. Holding. decision making process by which a real estate investment trust, or REIT, converts $1 of unitholder capital into $1 of investment real estate. Focusing equally on the people and the process, the