Property Portfolio Management, An Introduction – Part I

Property Portfolio Management, An Introduction – Part I

Real estate portfolio or funds management differs radically from managing equity, bond or mutual funds in that real estate managers are not only responsible for asset allocation, risk management and transaction supervision, but also for managing the execution of asset strategy. Unlike equity managers, who research companies and manage the probabilities that they can execute their articulated strategies, real estate managers must help define and execute on property-level opportunities.

So, real estate asset management, unlike traditional asset management, requires experienced individuals who can optimize the value of properties through superior transaction and management execution. In fact, in many ways, a real estate asset manager is a lot like a company CEO. (Investopedia)

We strongly agree with the previous paragraph, thus we propose a simple exemplification on a real portfolio. But Before giving any kind of advice we will first formulate a simple setup using as reference macro and micro data, then we evaluate the provided portfolio using the Black-Litterman asset allocation model. Finally we build the efficient frontier and provide suggestions and improvements.

1. UK Economy

The current price of a bond ought to be equal to the discounted value of all future cash flows, then, other things being equal, a fall in the discount rate ought to lead to a rise in price. But are other things equal? Low real interest rates should suggest low expectations for future growth. This is true whether it is the result of supply and demand for savings or whether low rates has been engineered by Central Banks [ECO2].

The economy is growing as uncertainty and credit conditions start to unlock demand, the durability of the recovery will depend on the extent to which productivity grows up alongside demand. CPI inflation fell to 2.2% in October 2013. Although official statistics suggest that capital expenditure is yet to increase, companies’ investment has also improved on the back of reduced uncertainty and improved access to credit, as well as stronger demand prospects. But access to finance for small businesses remains constrained. Strong employment growth in the face of weak demand has weighed on productivity, unusually weak since 2008.

The necessary adjustments to indebtedness and competitiveness within the euro area could be a drag on growth. Regard to yields, at longer maturities, sovereign bond yields exhibit a high degree of correlation, mainly because investors see advanced-economy bonds with similar risk characteristics as close substitutes [BOE], [OECD],[CHOU].

2. UK Property Investment Market

The top 10% of households own about 91,4% of outstanding stocks and mutual funds, up from 84,5% in 2001. The richest 1% owns almost half of all stocks and mutual funds [ECO1].

Property Portfolio Management

The property market, especially the residential sector, had inflated from 1990 until 2008, with a rate of growth in prices that cannot be compared with the rate of growth of wages. After the credit crunch in 2007 the mortgage banking sector had been experienced one of the longest period of tight liquidity.

Today the investment market is dominated by two overriding themes. The first is the continued importance of foreign capital. This is particularly evident in the Central London office market where cross border flows accounted for 62% of all transactions in London in 2011. Another persistent feature of the investment market is the widening of the yield gap between prime and secondary property as the majority of investors focus on prime properties with long income streams. Whilst the number of banks actively lending to commercial property has not completely dried up, terms remain prohibitive on all but the best stock and in the short term this may exacerbate the prime/secondary divide [SAV],[RICS].

Commercial Sector

The yield improvements that had been restricted to prime properties are now being experienced across the quality and geographical spectrum. This is mainly for two reasons: the scarcity of prime continues, thus the definition of ‘secondary’ widens and the downward shifts in prime yields required by persistent stock constraint. The UK’s retail market was probably the hardest hit during the downturn as the high street and out of town markets saw the disappearance of a number of retailers. In the office sector the most successful regional office markets will still be the strong private sector towns and cities where public sector cuts are less relevant, all of the key cities have seen a supply fall over the last 12 months. The hotel sector has turned a corner with its sixth month of consecutive profit growth. Serviced apartments are finally evolving as a recognized sector in the UK as private equity funds enter the market through the creation of their own brands and operating platforms [SAV],[RICS].

Property Portfolio Management

Residential Sector

The improvement in market conditions is becoming more widespread. The pace of demand exceeded that of supply in every part of the country, pushing up prices. Certain policies such as the Bank of England’s Funding for Lending scheme, which has contributed to the current low level of mortgage rates, and the government’s Help to Buy scheme are helping to boost the demand for housing. In the rental market, conditions are little changed over the month, with landlord instructions more or less stable and moderating growth in tenant demand, partly because mortgage finance is becoming more readily available. Rent expectations are more or less unchanged from last months, and are expected to grow by 1.7% over the coming 12 months [SAV],[RICS].

Property Portfolio Management

Regional Aspects

London has outperformed the rest of the UK since the middle of 2005, effectively on both sides of the downturn. In the residential sector, London and the South East remained the strongest performers. While prices continue to escalate in London, growing yields and affordable prices in Scotland are attracting capital from UK and international buyers, mainly because of the improved mortgage lending. In the London hotel sector, the ended Olympic Games are weighting on the operational performance but occupancy continues to improve. In the last ten years the London’s principal shopping streets had increased their density of shops more than 50%; generally in the retail sector, despite a reduction in occupational demand, prime rents have continued to increase. The scarcity of investment stock coupled with increasing demand levels has pushed up the yields in the office sector, the proportion of investment outside London rise by 14%. Previously, from 2002 to 2007, the level of investment outside London accounted for two thirds of the total, since 2008 just to 50% [SAV],[RICS].


Rics,, surveys, [RICS]

Savills,, research, [SAV]

The Economist,,

03/06/13, Buttonwood, [ECO1]

20/04/12, Buttonwood, [ECO2]

03/03/12, The Economist, [ECO3]

Bank of England, Inflation Report Nov 2013, [BOE]

OECD,, statistical profiles, [OECD]

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