CFAspace CFA Level II Private Real Estate Investments Part I
CFA Lecturer: Zhaoyun Ji a Provided by APF Academy of Professional
Finance
Slide 2
Map Academy of Professional Finance Copyright CFAspace.com Real
estate investments Basic forms Characteristi cs Classification s
Private real estate Reasons to invest Principal risks Role plays in
a portfolio Commercial property Due diligence Indices Financial
ratios Valuing real estate properties Cost approach Sales
comparison approach Income approach
Slide 3
Learning Outcome Statement a LOS a: Classify and describe basic
forms of real estate investments. Academy of Professional Finance
Copyright CFAspace.com Figure is adapted from: 2014 CFA Kaplan
Level 2 Study Note Book 4
Slide 4
Learning Outcome Statement b LOS b: Describe the
characteristics, the classification, and basic segments of real
estate. Academy of Professional Finance Copyright CFAspace.com Real
estate characteristics HeterogeneityHigh unit valueActive mgt High
transaction cost Depreciation and desirability Cost and
availability of debt capital Lack of liquidity Difficulty in
determining price
Slide 5
Learning Outcome Statement b Academy of Professional Finance
Copyright CFAspace.com Real estate property types Residential
Single family Multi-family Non- residential Commercial properties
others
Slide 6
Learning Outcome Statement c, l LOS c: Explain the role in a
portfolio, economic value determinants, investment characteristics,
and principal risks of private real estate. Academy of Professional
Finance Copyright CFAspace.com LOS l: Explain the role in a
portfolio, the major economic value determinants, investment
characteristics, principal risks, and due diligence of private real
estate debt investment. Reasons to invest in real estate Current
income Capital appreciation Inflation hedgeDiversificationTax
benefits
Slide 7
Learning Outcome Statement c, l Academy of Professional Finance
Copyright CFAspace.com Principal risks Business conditions New
property lead time Cost & availability of capital Unexpected
inflation Demographic factors Lack of liquidity Environmental
issues Availability of information Mgt expertiseLeverageothers
Slide 8
Learning Outcome Statement c, l Academy of Professional Finance
Copyright CFAspace.com Role of real estate in a portfolio Bond
like: periodic rent pmts Stock like: capital appreciation of the
property fluctuates with market. Role of leverage in real estate
investments Given the condition that the investment return is
larger than the debt interests, using leverage can increase
returns.
Slide 9
Learning Outcome Statement d LOS d: Describe commercial
property types, including their distinctive investment
characteristics. Academy of Professional Finance Copyright
CFAspace.com Comerical property types officeGross leaseNet
leaseindustrialRetailMulti-family
Slide 10
Learning Outcome Statement e LOS e: Compare the income, cost,
and sales comparison approaches to valuing real estate properties.
Academy of Professional Finance Copyright CFAspace.com Valuation
approaches: Cost approach: a buyer would not pay more for a
property than it would cost to purchase land and construct a
comparable building. Sales comparison approach: buyer would not pay
more than others Income approach: present value of future cash
flows
Slide 11
Learning Outcome Statement f, g LOS f: Estimate and interpret
the inputs (for example, net operating income, capitalization rate,
and discount rate) to the direct capitalization and discounted cash
flow valuation methods. LOS g: Calculate the value of a property
using the direct capitalization and discounted cash flow valuation
methods. Academy of Professional Finance Copyright CFAspace.com
Income approach Direct capitalization method: capitalizing the
first year NOI with a capitalization rate. Discounted cash flow
method: PV of the future cash flows using a discount rate
Slide 12
Learning Outcome Statement f, g Academy of Professional Finance
Copyright CFAspace.com Net Operating Income (NOI) & Stabilized
NOI Rental income if fully occupied + Other income =Potential gross
income - Vacancy and collection loss = Effective gross income
-Operating expense =Net operating income (NOI) +/- Temporarily
Income/Loss =Stabilized NOI
Slide 13
Learning Outcome Statement f, g Academy of Professional Finance
Copyright CFAspace.com Capitalization rate Discount rate (the
required rate of return) = risk-free rate + risk premium Cap rate =
Discount rate Growth rate = r-g Property Value = NOI 1 / r-g
Slide 14
Learning Outcome Statement f, g Academy of Professional Finance
Copyright CFAspace.com Upfront premium % = (CDS spread - CDS
coupon) * CDS Duration price of CDS (per $100 notional) = $100 -
upfront premium % Example is adapted from: 2014 CFA Curriculum
Level 2 Book 5
Slide 15
Learning Outcome Statement f, g Academy of Professional Finance
Copyright CFAspace.com Answer: Example is adapted from: 2014 CFA
Curriculum Level 2 Book 5
