The Role Of Real Estate In The Family Office Portfolio

CENTER FOR REAL ESTATE

The Role Of Real Estate In The Family Office Portfolio

Forums on Issues and Innovations in Real Estate (FIRE)

MIT Center for Real Estate and Taurus Investment Holdings, LLC

October 27, 2006

Professor Tony Ciochetti, Chairman

MIT Center for Real Estate


• Overview of MIT Center for Real Estate

• Prof. Dr. Tony Ciochetti, MIT Center for Real Estate - Real Estate as an Investment

• Prof. Dr. Rolf Tilmes, European Business School - Background on the Family Office Portfolio

• Thomas Brown, Deutsche Bank AG Private Wealth Management - Global Products and Sources for Real Estate Capital

• Dr. Jürgen Schäfer, MRICS, FERI Finance AG - Direct Investments in German Real Estate

• Gerard de Gunzburg, Macquarie Capital Partners Ltd. - Co-Investing with Specialist Real Estate Operator

• Caspar Noble, Deloitte & Touche LLP - Tax Issues Associated with Real Estate Investment

• Question and answer

• Reception

Agenda


• 1984 - Based in MIT’s School of Architecture and Planning

• With a mission to:

– Improve the global built environment

– Elevate the real estate industry

• Through the means of:

– Educational programs – MSRED

– Research

– Industry outreach

MIT Center for Real Estate


Education Research

Industry

Core Values


Center for Real Estate

• MSRED– Core courses, electives, thesis, global

orientation


• Global real estate investment banking – CS First Boston, Merrill Lynch, Goldman Sachs, Lehman Brothers, Blackstone, Morgan Stanley, JP Morgan, Deutsche Bank

• Real estate investment management – AEW, Taurus Investment Holdings, LLC, GE Capital, RREEF, TA Associates, Lonestar, Colony Capital, Invesco, Fidelity, ING Clarion

• Real estate finance – John Hancock, Sun Life, World Bank, Freddie Mac, Moody’s, KeyBank, Carr Capital, Prudential, HUD, Credit Suisse, Nomura, Bank of America

• Real estate development – Hines, Kravco, Leggatt & McCall, Trammell Crow, Related Companies, Tishman, Bovis-Lend Lease, Petrini, Taurus Investment Holdings, LLC, Spaulding and Slye (JLL), HRO, Forest City Commercial

Recent Employers


• Publicly traded companies – Boston Properties, Pro Logis, AMB, Federated, AvalonBay, Equity Office Properties, Regency

• Commercial brokerage – Jones Lang LaSalle, CB Richard Ellis, Cushman and Wakefield, Meredith and Grew, Marcus and Millichap

• Corporate real estate – Dell, Fidelity, Met Life, Boeing, Burger King, Staples

• Non-profit sector – Oakland California Community Housing, Enterprise Foundation, City of Toronto, Urban Redevelopment Authority (Singapore), OMB (NYC)

Recent Employers


Center for Real Estate

• MSRED– Core courses, electives, thesis, global orientation

• Research– HAI, CREDL, NCD

• Industry involvement– Research initiatives, hiring students, advisory

board, international outreach, PDC/Executive education, Forums on Issues and Innovations in Real Estate (FIRE)


Tokyo

Beijing

Shanghai

Hong Kong

Stockholm

London

Paris

Berlin

Frankfurt

MunichSan Francisco

Los Angeles

Chicago

New York

D.C.

‘Catching the FIRE’


• > 750,000 HNWI in Germany

• UHNWI control > $1tn in assets

• Role of real estate in these portfolios?

Real Estate and Family Offices


• Do I receive appropriate returns?

• What is the risk profile of those returns?

• By adding this asset - will it help my portfolio performance?

• How much hassle is it to ‘play in the space’?

Why Real Estate – Why Any Asset?


• Will I get my money back?

• Keeping up with inflation?

• Will the asset help my portfolio?

• How do I do it?

Fundamental Issues


Capital Preservation? 406 Investment Periods, 11 with Negative Return (2.7%)

1978 16.111979 18.27 20.461980 18.20 19.26 18.071981 17.81 18.38 17.35 16.631982 16.08 16.08 14.65 12.97 9.441983 15.58 15.48 14.27 13.02 11.26 13.121984 15.33 15.20 14.18 13.23 12.11 13.48 13.831985 14.81 14.63 13.68 12.82 11.89 12.73 12.53 11.231986 14.07 13.82 12.90 12.06 11.17 11.60 11.10 9.76 8.301987 13.45 13.16 12.27 11.47 10.63 10.87 10.32 9.17 8.15 8.001988 13.10 12.80 11.98 11.24 10.49 10.66 10.18 9.28 8.64 8.81 9.631989 12.64 12.33 11.55 10.85 10.14 10.25 9.77 8.98 8.42 8.46 8.69 7.761990 11.81 11.46 10.67 9.96 9.24 9.22 8.67 7.83 7.17 6.88 6.52 4.99 2.291991 10.47 10.04 9.22 8.45 7.66 7.46 6.78 5.80 4.93 4.26 3.35 1.34 -1.73 -5.591992 9.42 8.95 8.12 7.32 6.52 6.23 5.49 4.49 3.56 2.79 1.78 -0.09 -2.58 -4.93 -4.261993 8.90 8.43 7.62 6.86 6.08 5.78 5.07 4.14 3.29 2.59 1.71 0.20 -1.61 -2.87 -1.48 1.391994 8.75 8.30 7.54 6.82 6.10 5.83 5.19 4.36 3.63 3.06 2.37 1.21 -0.06 -0.64 1.07 3.85 6.381995 8.68 8.26 7.54 6.87 6.20 5.96 5.38 4.65 4.01 3.54 3.00 2.09 1.17 0.95 2.65 5.07 6.96 7.531996 8.76 8.37 7.70 7.08 6.47 6.26 5.75 5.11 4.57 4.20 3.79 3.08 2.43 2.45 4.14 6.35 8.06 8.91 10.301997 9.02 8.65 8.03 7.47 6.92 6.76 6.32 5.76 5.31 5.05 4.76 4.23 3.79 4.01 5.70 7.82 9.49 10.55 12.09 13.901998 9.35 9.02 8.45 7.94 7.45 7.33 6.95 6.48 6.12 5.94 5.75 5.37 5.11 5.47 7.15 9.18 10.81 11.95 13.46 15.07 16.251999 9.44 9.13 8.59 8.12 7.66 7.56 7.22 6.79 6.48 6.35 6.21 5.90 5.72 6.11 7.67 9.49 10.90 11.83 12.93 13.82 13.78 11.362000 9.56 9.27 8.77 8.32 7.90 7.82 7.51 7.13 6.86 6.76 6.66 6.42 6.30 6.71 8.17 9.83 11.09 11.90 12.79 13.43 13.27 11.81 12.252001 9.47 9.18 8.70 8.27 7.87 7.79 7.50 7.14 6.89 6.79 6.71 6.49 6.38 6.76 8.08 9.55 10.61 11.23 11.86 12.17 11.74 10.28 9.74 7.292002 9.36 9.08 8.61 8.20 7.82 7.73 7.46 7.12 6.88 6.79 6.71 6.50 6.41 6.76 7.96 9.26 10.17 10.66 11.11 11.25 10.72 9.38 8.73 7.01 6.752003 9.34 9.08 8.63 8.24 7.87 7.79 7.53 7.21 6.99 6.92 6.85 6.67 6.59 6.93 8.04 9.24 10.06 10.47 10.85 10.92 10.43 9.31 8.80 7.67 7.87 9.002004 9.53 9.28 8.86 8.49 8.15 8.09 7.86 7.57 7.38 7.32 7.29 7.14 7.10 7.45 8.53 9.67 10.45 10.87 11.24 11.36 11.00 10.15 9.91 9.34 10.03 11.71 14.492005 9.89 9.66 9.27 8.93 8.62 8.58 8.38 8.13 7.98 7.96 7.96 7.86 7.87 8.25 9.31 10.43 11.22 11.67 12.10 12.30 12.10 11.52 11.54 11.40 12.46 14.43 17.24 20.06

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Yea

r S

old

Year PurchasedSource: NCREIF

Returns: > 10%

Returns: 0 - 10%

Returns: Negative

Bought ’83 – Sold ’86 = 11.60% Avg.


Inflation Protection?(10 year rolling returns)

0

2

4

6

8

10

12

14

16

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Acquisition Year

Retur

n (%

) NCREIF

CPI


Inflation Protection?(7 year rolling returns)

0

2

4

6

8

10

12

14

16

18

Acquistion Year

Retu

rn (%

) NCREIF

CPI


Risk/Return Profile(1982 – 2006)

CASH NCREIF LGB REIT SP

Mean 5.30 8.98 9.88 15.20 11.20

Std.Dev. 2.51 6.62 7.70 15.74 17.00

CV 2.11 1.36 1.28 0.97 0.66


Cross - Correlation of Return

NCREIF LGB SP CASH REIT

NCREIF 1.00 - - - -

LGB -0.18 1.00 - - -

SP 0.12 0.22 1.00 - -

CASH 0.01 0.33 0.11 1.00 -

REIT 0.09 0.31 0.50 -0.13 1.00


Does Real Estate Help Portfolio?

Efficient Frontier

0

2

4

6

8

10

12

14

16

0 2 4 6 8 10 12 14 16 18

Risk

Retu

rn (

%)

St_Bd_Ca_ RE

St_Bd_Ca

St_Bd_Ca_RE_RT

8.14%

9.6%

10.1%


What About Volatility of Real Estate?

Efficient Frontiers

2.00

2.50

3.00

3.50

4.00

4.50

3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00

Risk (Qtr.)

Retu

rn (

Qtr

.) ST_BD

ST_BD_RE7

ST_BD_RE10

ST_BD_RE12


Take Away?


Global Real Estate: Why?


What’s Driving Global Real Estate Demand?

• Weight of domestic capital • Attractiveness of real estate

• Improving property fundamentals

• Interest rates


US Property Acquisitions

$0

$50

$100

$150

$200

$250

$300

2001 2002 2003 2004 2005

billions

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

volume cap rate

Core property types $5 million and greater

Source: Real Capital Analytics – an MIT/CRE Partner

Surplus of Financial Capital to US Commercial Real Estate


$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Q1'02

2 3 4 Q1'03

2 3 4 Q1'04

2 3 4 Q1'05

2 3 4

billions

Other

UK

Euro

CN

Mid East

Australia

German

Source: Real Capital Analytics – an MIT/CRE Partner

Growth in Foreign Investment in US…


What’s Driving Global Real Estate Demand?

• Weight of domestic capital • Attractiveness of real estate

• Improving property fundamentals

• Interest rates

• Search for yield • Expand opportunity set• Diversification• Global economy-customer driven


Global Opportunities• The investable universe

of global real estate is approximately USD 8.0 trillion, or 16% of the total investable universe including global stocks and bonds

• The largest market, the US, comprises only about 39% of the total universe of real estate, so even for US investors significant opportunities exist outside of the country

Source: UBS Global Asset Management, Real Estate research as at 31 December 2005. This data does not include single-family homes


Expanding REIT Universe: $240 bn -> $650 bn

Source: UBS Global Asset Management, Real Estate research


1$11.861 billion priced as of March 31, 2006Source:Morgan Stanley Estimates, Commercial Mortgage Alert

80.0

70.3

35.2

20.828.7

22.7

12.19.40.63.60.91.12.80.30.00.6

Issuance 1991 – 2006P

$Bn

91 93 95 97 99 0192 94 96 98 00 02 03 04 06P105

Global Growth in CMBS


Global Challenges• Transparency –> ‘comfort’ level• Emergence of debt markets – f (title/property rights)• Yield compression• Local nature of real estate -> partnerships• Investment segmentation

– Opportunity/hedge funds

– Private equity

– Value added/core plus/core?

• Role of global integration on investment strategy?


How Do I Do It?

• Equity– Private: Core, Core Plus, Value Added, Opportunity, Hedge, P/E– Public: REITs, REOCs, – OE/CE funds

• Debt:– Private: CM’s– Public: CMBS, CDOs

• Derivatives – Swap products


How Does This Relate to Family Offices?

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