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Academy of Professional Finance 专业金融学院
CFA Level II
Private Real Estate Investments
Part I
CFA Lecturer: Zhaoyun Jia
Map
Basic forms
Real estate
investments
Characteristi
cs
Classification
s
Reasons to
invest
Principal
risks
Role plays in
a portfolio
Private real
estate
Commercial
property
Due
diligence
Indices
Financial
ratios
Cost
approach
Valuing real
estate
properties
Academy of Professional Finance 专业金融学院
Sales
comparison
approach
Income
approach
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Learning Outcome Statement a
LOS a: Classify and describe basic forms of real estate
investments.
Figure is adapted from: 2014 CFA Kaplan Level 2 Study Note Book 4
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Learning Outcome Statement b
LOS b: Describe the characteristics, the classification, and
basic segments of real estate.
Real estate
characteristics
Heterogeneity
High unit value
Active mgt
High transaction
cost
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Depreciation and
desirability
Cost and
availability of
debt capital
Lack of liquidity
Difficulty in
determining
price
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Learning Outcome Statement b
Real estate
property types
Residential
Nonresidential
Single family
Commercial
properties
Multi-family
others
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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.
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
Academy of Professional Finance 专业金融学院
Inflation hedge
Diversification
Tax benefits
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Learning Outcome Statement c, l
Business
conditions
New property
lead time
Cost &
availability of
capital
Unexpected
inflation
Demographic
factors
Principal risks
Lack of
liquidity
Environmental
issues
Availability of
information
Mgt expertise
Leverage
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others
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Learning Outcome Statement c, l
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.
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Learning Outcome Statement d
LOS d: Describe commercial property types, including their
distinctive investment characteristics.
Gross lease
office
Net lease
industrial
Comerical
property types
Retail
Multi-family
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Learning Outcome Statement e
LOS e: Compare the income, cost, and sales comparison
approaches to valuing real estate properties.
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
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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.
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
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Learning Outcome Statement f, g
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
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Learning Outcome Statement f, g
Capitalization rate
Discount rate (the required rate of return) = risk-free rate + risk
premium
Cap rate = Discount rate – Growth rate = r-g
Property Value = NOI1/ r-g
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Learning Outcome Statement f, g
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
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Learning Outcome Statement f, g
Answer:
Example is adapted from: 2014 CFA Curriculum Level 2 Book 5
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