Purpose
The RES Asset Allocation Model offers an intuitive framework for real estate portfolio construction, complete with tailored risk considerations and supported by quarterly updates and client support. Fully customisable to your organisations’ requirements, the key benefits of the RES approach lie in its systematic evaluation of each driver of return (growth, vacancies, and costs). By stepping through each factor’s impact on portfolio risk and return, with clearly defining assumptions, the whole organisation gains an understanding of the sources of risk and return. With swift installation, your team can promptly integrate and utilise the model.
Solution
- A mean-variance model inclusive of specific risk
- Serviced with quarterly updates and client support
- Flexible inputs for:
- Investment objective
- Investment horizon
- Risk tolerance
- Expected returns and volatility based on a bottom-up cashflow model driven by current pricing and expectations for:
- Rental growth
- Yield movements
- Capital expenditure
- Tenant rollover rates
- Letting periods
- Costs and fees
- Customisable market segments
- Customisable investment horizon
- Incorporates the impact of specific risk
- Variable leverage
- Ability to add alpha
- Stress test different scenarios
- Returns decomposed into yield impact, rental growth, capital costs, irrecoverable costs, vacancies and reversion
- Calculate Value-at-Risk
- Asset allocation strategy driven directly by House View expectations
- Captures time-varying risks
- Captures depreciation
- Captures leasing risks
- Captures the impact of portfolio quality
- Compelling, concise visual presentation of results
Case Study: Property Advisory Business
A property investment advisory business with a focus on high-quality assets in locations with strong prospects for long-term growth.
The aim of the project was to create an asset allocation strategy to deliver an investment return of 8% pa over 10 years.
An initial portfolio asset allocation strategy evaluating the risk and returns for portfolios of:
(i) varying levels of leverage;
(ii) different sector weightings, and;
(iii) split between core, income producing, property and developments.
Forward-looking expectations were agreed for mean and variation in market growth, development profits and income drivers.
Market returns modelled for the chosen segmentation.
Expected portfolio returns and risk measures based on portfolio exposures and number of core and development properties held in each segment.
Two portfolio strategies were evaluated:
(i) Low risk / capital preservation
(ii) Medium risk / capital growth
Results
| Portfolio A | Portfolio B | |
|---|---|---|
| Leverage (LTV) | 40% | 50% |
| Blended interest rate, % | 2.25 | 2.93 |
| Total return, % pa | 5.3 | 8.0 |
| Standard deviation | 6.5 | 16.5 |
| Return per unit of risk | 0.81 | 0.48 |
| Probability of return <0% | 21% | 31% |
| Probability of return >8% | 24% | 45% |
