Is Real Estate Real Case Solution
It can be said that there are many effects of the poorly managed properties, the effects could be financial and non-financial as well. Firstly, the returns would be drastically impacted, the ultimate and major impact of the poor management of the property will directly affect its earnings potential. Moreover, the value of the property is also expected to be reduce due to this poor management which will undermine the capital gains for the investors.
In addition to this, the risk of the investors will be increase, the inflation-hedging ability of the property will also be affected which will ultimately increase the exposure of investor and property to the inflation. The portfolio of the investor will become ineffective as it will fail to reduce the exposure of investor towards unsystematic risk.
Finally, the physical condition and reputation of the property will also be affected if the property is being poorly managed. The reputation of the property and management is of very importance in determining the earnings of the property, if the management, reputation and physical condition plays a very important role in defining the future prospects of the property. The properties which are poorly managed also takes substantial time resources of management in selling or renting out.
It can be said that the property is very effective and good as an inflation hedge as compare to the stocks and government and corporate bonds. The correlation between the property returns and inflation is positive in almost all the years except for some quarters which depicts the effectiveness of the property as an inflation hedge.
As described in the previous questions, the property can be very effective tool and have great inflation-hedging ability if uses effectively and efficiently. On the other hand, the stocks and bonds have negative correlation with the inflation in majority of the periods which describes their ineffectiveness if used for inflation hedging.
Based on the inflation-hedging ability of the properties, it can be said that the correlation is very positive between the different types of properties and inflation. The prices and value of the properties will increase if the inflation increases and if the properties are used for inflation hedging the results would be favorable.
On the other hand, the correlation between the stocks and inflation is very weak, same is the case for corporate bonds as the correlation is negative between stocks, bonds and inflation. If the stocks and bonds are used to hedge against the inflation, the results would be unfavorable.
The optimal return if Carole wants to include property in her investment portfolio should be 60:20:20 which means 60% of the total portfolio should comprises of stocks, 20% of the portfolio should be comprises of bonds and remaining 20% should be comprises of property. The property should include all types of properties such as Industrial property, hotels, apartments and offices.
However, the portion of retail properties should have to be lower as it is less beneficial for the investor use this type of property for inflation hedging and retail properties have poor inflation-hedging ability. Furthermore, there is no reasonable constraint in this case.
The Sharpe ratio if the proportion of Stocks, bonds and real estate is 60%, 30% and 10% respectively would be approximately 2.875. Moreover, if the portfolio comprises of 60% of equity, 20% of bonds and 20% of real estate, the Sharpe ratio would be 2.888.
It can be said that there is a lot of difference and variation in the returns of NCREIF and REITs, the main reason for the difference between the returns of both is the basis of returns. The returns of REITs are based on the performance of stock, if the stock performs good, the REITs will give higher returns. And if the stock perform worst, the return of REITs will also be worst. There is a direct relation between the returns of REITs and stock, the result of REITs are based on the returns generated by the stock but the returns of stock are not based on the returns of REITs.
On the other hand, the NCREIF’s returns are relatively straightforward. They don’t get fluctuated due to variation in the performance of stock and REITs. However, the returns of NCREIF are generally based on the returns generated by the real estate investors by both rental income and capital gains. At the year end, the registered investors of NCREIF submits their monthly, quarterly and yearly income and expenditures which is aggregated to compute the general return of NCREIF.
The results and returns of NCREIF are very straightforward and smooth, the reason for that is the positive auto correlation, there is a very positive auto correlation between the returns of NCREIF and the inflation which makes the returns of NCREIF very smooth and straightforward. In addition to this, the real estate market is very seasonal, the returns in the summer months are very high and the returns in the winter months are particularly less aggressive which makes the auto correlation so positive which ultimately makes the returns of NCREIF very smooth………………..
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