Thesis Research
2007 Theses
Following are a selection of theses abstracts by members of the Class of 2007. Join MITREX (The MIT Real Estate Exchange) to download complete theses. For non MITREX members, theses can be purchased from the MIT Libraries.
A Streamlined Real Options Model for Real Estate Development
Baabak Barman
Kathryn E. Nash
Abstract
Choosing The Right Way: A Comparative Analysis of Entitlement Methods for Private Large-Scale Developments in Boston
Dmitry Baskin
Abstract
Select-Service Hotels: A Guide to Understanding the Lodging Industry and One of Its Most Attractive Segments
Brandon B. Berger
Donald J. Chiofaro Jr.
Abstract
Real Estate Opportunities in Energy Efficiency and Carbon Markets
Aaron G. Binkley
Abstract
PIECING TOGETHER MODULAR: UNDERSTANDING THE BENEFITS AND LIMITATIONS OF MODULAR CONSTRUCTION METHODS FOR MULTIFAMILY DEVELOPMENT
PETER J. CAMERON, JR.
NADIA G. DI CARLO
Abstract
Does Property Market Risks Matter in Commercial Mortgage Loan Pricing: An Inquiry Into the Determinants of Commercial Mortgage Loan Spread
Xin Wang
Hongfei Chen
Abstract
Developing a New CMBS Hedging Tool: A Property Price Index-Based Synthetic
Juthatham Bo Chirathivat
Abstract
Turkish Residential Real Estate Investment Analysis
Berk Ciller
Abstract
Building Information Modeling: Value for Real Estate Developers and Owners
John C. Clason
Abstract
The Point of Corumbau: A Case Study in Emerging Market (Brazil) Real Estate Development Feasibility Analysis
Paul B. Clayton
Abstract
An Analysis of Appraised Values and Actual Transaction Prices in the US CMBS Market
Yili Zhong Dolan
Abstract
Opportunities and Challenges of Investing in Emerging Markets: A Case Study of Panama
Marianne Ganster
Abstract
The Highest and Best Use Assessment of an Adaptive Reuse Development A Former Agere Systems Campus Redevelopment Plan
Jin Hsiao Hsu
Abstract
Asian Real Estate Investment: Data Utilization for the Decision Making Process
Keun Huh
Abstract
Entitlement Advantage: The Balance of Local Knowledge and Capital Access in Real Estate Entitlements
Scott Edward Kelley
Abstract
ADJUSTED PURE-PLAY PORTFOLIO REIT EQUITY INDEX HISTORICAL PERFORMANCE OF PUBLIC AND PRIVATE REAL ESTATE INVESTMENT 1987 - 2005
Dongwook Kim
Abstract
Analysis of Korean Real Estate Investment Trusts and Share Price Determinants
Haegyu Lee
Wonho Seo
Abstract
Low Income Housing Tax Credit Deals: Year Fifteen Restructuring Strategies
Lillian Lew-Hailer
Abstract
Towards A New Real Estate: Innovative Financing for a Better Built Environment
Matthew J. Lister
Abstract
A Comparative Study of Real Options Valuation Methods: Economics-Based Approach vs. Engineering-Based Approach
Shuichi Masunaga
Abstract
The Impact of Climate Change on Ski Resort Operations and Development: Opportunities and Threats
Daniel D. D. McGill
Abstract
GREEN LUXURY STUDENT HOUSING: A REAL ESTATE FEASIBILITY STUDY
Matthew E. Pace
Abstract
Mispricing Income Growth: Exploring Inefficiencies in Commercial Real Estate Pricing
Patrick D. Rowe
Abstract
A Successive Effort on Performance Comparison Between Public and Private Real Estate Equity Investment
Jengbin Patrick Tsai
Abstract
Barriers to Growth in the US Real Estate Derivatives Market
Jani Venter
Abstract
The Implications of US Senior Housing to China
Yong Wang
Abstract
A Streamlined Real Options Model for Real Estate Development
Baabak Barman
Kathryn E. Nash
Advisor: David Geltner, Professor of Real Estate Finance
This thesis introduces a streamlined model that incorporates the value of the real options that exist in real estate development projects. 1 Real options add value to a project by providing developers with flexibility to minimize downside risk or take advantage of upside potential as conditions change from deterministic expectations. Though developers currently incorporate this value into their decision making using intuition and judgment, the model presented here provides a tool with which developers can value options in a rigorous and quantitative fashion. Though the model should not be used as a comprehensive land residual model, it serves as a powerful proof of concept for real options analysis in the field of real estate. Further, it can be used to measure the relative value and risk of projects with and without real options.
The model is based on both the traditional economic and the more recent engineering real options methodologies. Both approaches have been applied to real estate development projects, but have not yet caught on due to their newness and complexity. The streamlined model incorporates the elements of both methodologies that are most applicable to current development practice. In addition, the model is simplified and tailored to existing valuation techniques. The added benefit of this “hybrid” approach is that it reduces the learning curve associated with real options analysis so as to encourage its adoption in the real estate field in the short term.
The model uses Monte Carlo simulations in Excel and is targeted towards specific options scenarios commonly faced by developers; specifically, the options to phase a project, choose among multiple uses, and defer development. A case study demonstrates the model, and compares the results of building two phased buildings versus a single larger building on the same site. The results show that the phased program results in less risk and a higher expected net present value than the single building program, while the option to defer development adds significant value to both programs.
Choosing The Right Way: A Comparative Analysis of Entitlement Methods for Private Large-Scale Developments in Boston
Dmitry Baskin
Advisor: Peter Roth, Lecturer, Department of Architecture
In order to keep up with changing urban landscapes, zoning regulations need to be altered
and revised to maintain the most appropriate land use. Boston, Massachusetts is a city that has
experienced considerable demographic evolution in the past 100 years. In efforts to remain
current with the growing and changing needs of the commercial and residential community,
developers have employed various methods to permit their projects. Specifically for large
projects that do not conform to the underlying zoning constraints, entitlements can be obtained
via zoning variances & special permits, creation of a Planned Development Area, a map
amendment changing the zoning designation of their site, or use of a Chapter 121A agreement.
Each of these methods can be used under specific conditions, relating to the project’s context,
size, location, and dimensions. Four case studies are presented which highlight the individual
entitlement methods; data was obtained via interviews with the developers, Boston
Redevelopment Authority staff, industry attorneys, and consultants involved in the case projects.
Since the procedures for obtaining entitlements can be challenging, it is necessary to understand
the appropriate path to take in order to select the correct method. A decision tree has therefore
been developed to assist in determining the most suitable course based on the specific variables
of each project. Although the overall process for permitting a project can be lengthy and taxing,
knowing the proper steps to take and maintaining a level of flexibility can greatly assist in
attaining a successful outcome.
Select-Service Hotels: A Guide to Understanding the Lodging Industry and One of Its Most Attractive Segments
Brandon B. Berger
Donald J. Chiofaro Jr.
Advisor: Brian Anthony Ciochetti, Professor of the Practice of Real Estate
This thesis serves as a pedagogical guide to the hospitality industry, and presents a broad
overview of the unique issues that arise through the development, ownership and management
of select-service franchised hotels. It attempts to answer the following four questions:
How is the lodging industry organized?
How has the industry changed over time, and where is the industry headed?
What hotel product type is particularly attractive from a development, investment and
operational standpoint?
What are the issues to be aware of when developing this particular product?
To answer the first two questions, Section One of this paper offers a full discussion of the
industry evolution and focuses on three major innovations that have been gaining momentum
in the lodging industry. These innovations are the trends toward franchising, market
segmentation, and the “life-style” brand. The study will describe how franchise and
management relationships have gained strength in the lodging industry since their introduction
in the mid-twentieth century. The study will then explore the intricacies of the on-going
process of market segmentation. Through market segmentation, hotel firms have been able to
create and introduce greater operationally efficient hotel typologies, one of which is the selectservice
hotel. Finally, this section of the thesis will explain how the third innovation--that of the
"life-style" brand hotel--combined with the ideas of franchising and of operationally efficient
product types, has borne into the hotel market a new and exciting product, the select-service
franchised life-style hotel called Aloft.
Section Two of the study will address the third and fourth questions by presenting a broad
overview of the development process for a hotel of this type, as well as highlight the most
pertinent issues and requirements that are associated with such a development. Additionally,
this section will explore the relationships associated with owning and operating a franchised
hotel, and the advantages and pitfalls of owning and building an asset under such an
arrangement.
Real Estate Opportunities in Energy Efficiency and Carbon Markets
Aaron G. Binkley
Advisor: Brian A. Ciochetti, PhD, Professor of the Practice of Real Estate
Global interest in the effects of climate change has grown rapidly in recent years. The US
federal government mulls a cap and trade system for large carbon emitters while states
implement their own greenhouse gas schemes. Private industries are beginning to see the need to
address their greenhouse gas footprints and are increasingly offsetting their carbon emissions.
The real estate industry has been under little scrutiny in spite of being responsible for over 40%
of all US greenhouse gas emissions.
The real estate industry is in the unique position of being able to reduce greenhouse gas
emissions through energy efficiency improvements that are low cost and that create value within
the underlying asset. The objective of this research is two-fold: First, to examine the potential
value and feasibility of energy efficiency improvements, and second to determine if there is
sufficient value creation from abatement of greenhouse gas emissions, called offsets, to subsidize
further energy efficiency measures. Through a case study example I examine energy efficiency
improvements at two levels and determine the resulting greenhouse gas offsets on a state-bystate
basis. Then I evaluate energy savings and greenhouse gas offsets across a low and high
price range. Once the case study analysis is complete, I examine the magnitude of economic
value resulting from energy efficiency improvements and the sale of greenhouse gas emissions
offsets for the entire real estate industry.
My analysis indicates that there is potential for significant value creation. Opportunities are
focused in states where energy prices are higher and where greenhouse gas emissions from
power generation are greatest. In the case study, capital investment in energy efficiency has an
IRR range from 26.4% to over 125%. Greenhouse gas offset value increases IRR further;
providing an additional 26% increase in the original available energy retrofit funding. Net asset
value increases from 1.1% in a low carbon price scenario to 5.5% in a high carbon price scenario.
At the market level, efficiency improvements are worth between $40.3 and $201 billion annually.
Greenhouse gas emissions are worth an additional $1.46 to $48.8 billion. The sum of energy
efficiency and greenhouse gas emissions offsets have the potential to add between 1.0% and
6.1% to the value of the $4.03 trillion US commercial real estate market. I conclude that there is
significant potential for value creation resulting from rigorous energy efficiency improvements
and the sale of offsets in emerging greenhouse gas markets.
PIECING TOGETHER MODULAR: UNDERSTANDING THE BENEFITS AND LIMITATIONS OF MODULAR CONSTRUCTION METHODS FOR MULTIFAMILY DEVELOPMENT
PETER J. CAMERON, JR.
NADIA G. DI CARLO
Advisor: Peter Roth, Lecturer, Department of Architecture
The primary purpose of this thesis is to explain the benefits and limitations of modular
construction as it pertains to primarily wood-frame, multifamily housing in the United
States. This thesis attempts to educate the consumer/builder/developer about what the
modular construction process entails from beginning to end. Long term demographic
trends point to a steady and increasing need for housing production. Decreasing
development yields and increasing construction costs and regulations are making it
more difficult for the market to meet this need. It is the authors’ goal that the knowledge
contained in this thesis helps to introduce developers to the basic issues involved in this
relatively underutilized but potentially beneficial process.
Does Property Market Risks Matter in Commercial Mortgage Loan Pricing: An Inquiry Into the Determinants of Commercial Mortgage Loan Spread
Xin Wang
Hongfei Chen
Advisor: William C. Wheaton, Professor of Economics
The study takes a quantitative approach to test the determinants of commercial mortgage loan
pricing at origination. The determinants include capital market risk, property market risks,
mortgage terms and property characteristics. Taken into consideration of the endogenous factor
between loan spread and LTV ratio, we use the OLS and 2SLS model to examine the variables of
driving the spread and LTV and the interaction between them. The conclusion is drawn that there
is little linkage between property market risks and commercial mortgage loan spread at
origination. Therefore, commercial mortgage is mispriced in terms of property market risks.
Developing a New CMBS Hedging Tool: A Property Price Index-Based Synthetic
Juthatham Bo Chirathivat
Advisor: David M. Geltner, Professor of Real Estate Finance
By isolating credit as a distinct asset class, credit derivatives provide new vehicles for
synthetically trading and transferring credit exposure of commercial real estate without
buying or selling the physical assets. Recent developments of CMBS index-based synthetics,
namely the CMBX, have allowed systematic market exposure to a basket of CMBS credit
default swaps. The creation of these credit derivatives indices has enabled market
participants to trade rating-specific risk, hedge against market-wide credit risk, and express a
macro view within the CMBS sector.
This thesis identifies the key underlying source of credit default risk as the commercial real
estate market itself, and explores the concept of a CMBS default risk synthetic that is based
on transaction-based commercial property price index movements. Such indices would allow
investors to more precisely target and hedge the particular risk in their CMBS portfolios that
is exposed to specific commercial real estate markets tracked by the indices. The thesis
proposes a methodology for the new synthetic product to approximately replicate the credit
loss behavior of specific rated tranches of a CMBS.
This thesis utilizes Monte Carlo simulation to test the hedging performance of the proposed
property price index-based synthetic, considering both cash flow correlation and hedge ratio
analyses. The results reveal that the effectiveness of the hedge varies depending on the
investor’s horizon or degree of temporal precision the investor seeks in the hedge, as well as
the target tranche rating. The hedge ratio is very dynamic throughout the life of the
synthetic, suggesting that the investor buying the synthetic for hedging purposes would need
to rebalance his position accordingly.
The author believe that the possibility of utilizing commercial property price indices to
structure equity index-based credit derivatives, as demonstrated by methodologies in this
thesis, will enhance investment and risk management strategies for CMBS investors,
facilitating access to the breadth and depth of existing real estate equity indices. Further
pioneering efforts in the development of credit derivatives will be a catalyst for a
tremendous growth in the CMBS market.
Turkish Residential Real Estate Investment Analysis
Berk Ciller
Advisor: John Kennedy, Senior Lecturer, MIT Center for Real Estate
This paper examines the investment potential for Turkish Residential Real Estate Market, focusing mainly on Istanbul. With a stable economy since 2002, dynamic population, geo-political location and the potential accession to EU, Turkey provides exciting opportunities to local and international investors. Turkish economy, worldwide, ranks at twentieth in terms of GDP level and in 2005, ULI/ PriceWaterhouseCoopers has ranked Istanbul as the top development market.
The question the paper is trying to answer is: Does Turkey’s Residential Real Estate Market provide an attractive investment opportunity? To determine this I have reviewed the following factors: economic forecasts, political stability, newly enacted mortgage market, FDI forecasts, potential for foreign real estate ownership, current status & future predictions of real estate sector, potential of EU accession and comparison to Spanish & Romanian real estate markets. The method I used to accomplish this was mainly literature review and interviews with real estate brokers/developers.
Turkey’s economic stability, developing mortgage market, continuing FDI, foreigners’ investment in vacation houses, improving legal transparency and potential accession to European Union makes Turkey, especially Istanbul, an increasingly attractive market. On the other hand, political stability is crucial for economic stability. In addition, slow legal system, unregistered construction activity, insufficient quality of some buildings and limited infrastructure in certain parts of the country remain to be problematic issues.
Considering Turkey’s opportunities and risks, it is a top investment destination in Europe, dependent on sustainable political stability, an improved mortgage & legal system andsuc cessful implementation of EU accession plan.
Building Information Modeling: Value for Real Estate Developers and Owners
John C. Clason
Advisor: E. Sarah Slaughter, Senior Lecturer, Sloan School of Management
The Architecture, Engineering, and Construction industry severely lags behind the
manufacturing industry in terms of efficiency and productivity growth. This lag is a result of the
fragmented nature of the industry and its resistance to adopting innovative technologies and
processes that enable collaboration and efficiency. Building Information Modeling (BIM) is one
of these innovations. Since building owners ultimately absorb every cost associated with a
building project, they are in the best position to lead the AEC industry into an era of increased
productivity through the adoption of collaborative practices and technologies such as BIM.
However, owners cannot be expected to venture down this path unless they are aware of the
potential value that the proper use of BIM can create for them. Therefore, this paper provides
evidence of the value created for owners and developers by the use of BIM, and conveys that
evidence in a framework that follows the actual phases and tasks of a real development project.
Those phases are as follows: Market Research, Feasibility Analysis, Design, Construction, and
Operations. In addition to actual examples of value creation, theoretical examples of future
applications are discussed.
The value created for owners and developers by implementing BIM on their projects is
manifested primarily in the form of improved design quality and savings in time and money.
The Point of Corumbau: A Case Study in Emerging Market (Brazil) Real Estate Development Feasibility Analysis
Paul B. Clayton
Advisor: Lester C. Thurow, Jerome and Dorothy Lemelson Professor of Management and Economics
In 2003, Renata Oliveira, a young Portuguese architect, has re-discovered the Point of Corumbau
in Bahia, Brazil, and, like the Portuguese adventurers who had discovered Brazil 500 years earlier
in the same location, found it to be an area that is wild, beautiful and undeveloped. It is also
sitting right at the edge of perhaps the most promising resort and second home real estate market
in the world: the Northeast coast of Brazil. The case challenges students to conduct market and
project feasibility analysis in an emerging market environment, with data and contextual
information supplied in the case. It considers the effectiveness of such analysis, and raises
questions about the usefulness of time-series data in markets that are changing in fundamental
ways, the importance of macro- and international economics in weighing real estate investments,
the methods available for evaluating emerging market risk, the challenges of managing
development and construction in a foreign environment, and the role, if any, for a developer’s
personal vision in the value creation system. Part II of the case allows students to re-consider
these questions in the light of subsequent events. At the same time, the case examines two of the
most exciting real estate markets in the world today: Southeastern Brazil’s urban housing market,
and the resort and vacation home market of the coastal Northeast.
An Analysis of Appraised Values and Actual Transaction Prices in the US CMBS Market
Yili Zhong Dolan
Advisor: Henry O. Pollakowski, Principal Research Associate
This thesis addresses the characteristics of transaction-based indices and appraisal-based indices
and compares the difference between appraisal and transaction price in the United States
Commercial Mortgage-Backed Securities (CMBS) market. The examination is based on the
transaction database of Real Capital Analytics, Inc (RCA). A hedonic regression model is
applied to data for the period 2000-2006 to produce national indexes at the all-property, office
and retail levels. The hedonic model examines the relationship between appraised value or
transaction price and NOI, property characateristics, and time. The results are used to create
price and appraisal indices. Moreover, the results also prove that multivariate regression analysis
is a cost-effective statistical procedure for estimating property values in a time-varying approach.
Despite the charcteristics influence on price, the relationship between transaction and appraisal
behavior is demonstrated in this article. The transaction-based index reflects the timing and
changes of market price more accurately and effectively than appraisal-based index does during
the examination period. Comparing two appraisal indices, the one without transactions
(refinancing) is less volatile than the one with transactions (sale). The underlying reason is
appraisers have more pressure when there is a transaction occurred comparing with only for
refinancing deal. Therefore, they will appraise those properties with transactions higher than
refinancing ones.
In addition, after comparing appraisal index without transaction (refinancing) and transaction
index (sale), I learn that transaction index for sure leads appraisal index at least one period due to
its lagging issue. Therefore, we can predict appraisal index return based on transaction index.
These findings are very important for investors when valuing their investments. Those
constructed indices can be used to track market trends and to support tradable commercial
property price derivatives in the near future.
Opportunities and Challenges of Investing in Emerging Markets: A Case Study of Panama
Marianne Ganster
Advisor: Brian Anthony Ciochetti, Professor of the Practice of Real Estate Development
Many Real Estate investment firms are looking to the world’s emerging economies in
their real estate investment strategies to seek optimal returns in opaque or inefficient
markets. Although these investments carry increased political, regulatory and currency
risk, cross-border real estate investment has been on the rise. This thesis will broadly
explore the nature of investment in emerging markets and survey risks associated with
deploying capital in these markets, from the perspective of a foreign investor.
In order to assess explicit real estate opportunities and address the issues relevant to
investors pursuing them, the scope of research was narrowed to focus on one Latin
American country that has compelling opportunity for real estate investment: Panama. In
recent years, this emerging market has seen extraordinary growth and expansion of its
real estate sector, driven by domestic and international consumption related to trade,
tourism, and the upcoming expansion of the Panama Canal. This paper will explore the
real estate markets driven by these trends, analyze the specific risks associated with
investment in these markets, and offer practical considerations for how the real estate
“game” is played in Panama.
The Highest and Best Use Assessment of an Adaptive Reuse Development A Former Agere Systems Campus Redevelopment Plan
Jin Hsiao Hsu
Advisor: Lynn Fisher, Assistant Professor of Real Estate, Department of Urban Studies and Planning
Fix it up or give it up and start over? This interviews and case studies based research was conducted to determine important factors in a successful adaptive reuse development and applied them to a sizable and well maintained former electronic manufacturing campus in Orlando, Florida. Furthermore, wholesale mart was introduced and studied as the theme of new mixed-use project.
The process of identifying viable alternative uses for the property advances in two stages: (1) characterizing existing buildings and site, in regards to its size, physical features, location and market; (2) comparing demand characteristics of alternative uses and through elimination process arriving at single or mixed-use best use for the property.
The proposed new use of wholesale mart and accompanying trade shows may not be conventional real estate development and falls in the category of regional malls and hospitality amenities, where property management actively engaged in creating synergy and business opportunity for its tenants and customers.
Asian Real Estate Investment: Data Utilization for the Decision Making Process
Keun Huh
Advisor: David Geltner, Professor of Real Estate Finance
Many investors in developed countries believe the Asian emerging market to be highly risky due to numerous uncertainties including limited market information to make sound investment decisions. However, still successful investment deals were completed by many investors who are already in such markets, and how those investors make sound investment decisions is in need on explanation. Therefore, this thesis explores institutional real estate investors’ behavior on entrance to Asian emerging markets, their investment decision making process, and data utilization within each process. Through 14 qualitative in-depth interviews with key institutional investors in the U.S. and Korea, investment decision making processes and data utilization behaviors are examined and summarized in a generalized format. Interview results indicate that an initial entrance to Asian emerging markets occurs rather through a passive introduction of a potential deal by third party than an active search for a target deal by the investor. Also, the general decision-making process for real estate investment starts from sourcing and sorting, followed by review of a potential deal, primary investment committee meeting, due diligence, secondary investment committee meeting, and close of the deal. Each stage of the decision-making process is highly interconnected with simultaneous communication among responsible teams and the investment committee. The Korean real estate market, at least for the office sector, has such abundant market information available that it is rather perceived as “emerged.” Investors also have extensive experience in the market and use their market knowledge and third party information as a reference point to verify the deal information. However, they also physically collect market data and use their own internal transaction record when necessary. Furthermore, data utilization in Korea is found to be easy and convenient especially when combined with extensive market experience and a wide professional network in the industry.
Entitlement Advantage: The Balance of Local Knowledge and Capital Access in Real Estate Entitlements
Scott Edward Kelley
Advisor: Lynn Fisher, Assistant Professor of Real Estate
Development is risky. The process of getting a shovel in the ground, steel into the sky, and rent
checks into the bank involves distinct phases, each with their own risk and return profile.
Generally considered the most risky, the entitlement phase is process by which the development
entity gains the legal right to parcel land and develop a prescribed structure. This process sits at
the confluence of all development factors: local politics, due diligence, financial support, and
patience.
The purpose of this paper is to identify the critical organizational structures and human capital
required to reduce entitlement risk. It begins with an overview of the definition of entitlement
risk by generating a connection between financial projections and the idiosyncratic entitlement
process. Risk in the entitlement stage is a function of control. The entitlement process has
become increasingly complex in the last few decades with landowners and developer faced with
diminished control over land destiny. The study follows with a review of reported best practices
enlisted by developers to alleviate the risks in the entitlement process.
A paradox exists in real estate entitlements where the local player is advantaged by local
information and connections, but may lack capital while the national player is advantaged by
capital access, but may need local information and connections. The existence of this paradox
would suggest that national firms engaged in entitlements would adopt organizations and
strategies to help alleviate their weaknesses. Indeed, this is the case, as evidenced by the five
subject firms whose organization, strategy, partnering, geographic focus, and returns are
discussed and compared. Ultimately, firm structures of national players not only succeed in
diminishing the advantage of the local player, but do so in a fashion that brings exceptional
returns that meet the stringent expectations of their varied investors.
ADJUSTED PURE-PLAY PORTFOLIO REIT EQUITY INDEX HISTORICAL PERFORMANCE OF PUBLIC AND PRIVATE REAL ESTATE INVESTMENT
1987 - 2005
Dongwook Kim
Advisor: Henry O. Pollakowski, Principal Research Associate
The public real estate market was initiated by the Real Estate Investment Trust Act of
1960. Since then, investors have been concerned with the assessment of performance
comparisons between publicly held assets and privately held assets. The main concern for
the assessment is to reveal historically which type of ownership provided the more efficient
vehicle for the investors. The National Council of Real Estate Investment Fiduciaries
(NCREIF) provides the investment performance of privately held commercial real estate,
and the National Association of Real Estate Investment Trust (NAREIT) provides that of
publicly held commercial real estate by REITs. However, direct comparison between the
two indexes is problematic due to the different characteristics of each market and the lack
of historical data for accurate assessment.
The primary purpose of this study is to adjust characteristics of commercial REIT assets
underlying one portfolio to match the characteristics of privately held commercial assets.
Since SNL data base provides hedonic data from 1995 and CRSP & Compustat merged
data base provides up to 2005 Q4, the sample period of this research is from 1995 Q1 to 2005 Q4. This quarterly assessment is conducted at the property sector (retail, apartment,
office and industrial), then at the aggregate level.
The main research of this thesis is to create adjusted REIT equity index that is derived
from the following treatments in the thesis. Pure-Play’ Portfolio Methodology will be applied to
replicate the performance of four real estate property-type sectors defined by NCREIF –
Implemented updated Equity to Total Asset ratio from De-leveraging REIT returns by WACC
formula based on CRSP and Compustat merged data to obtain the value weights of equity, debt
and total assets. As a proxy for the returns of debts held by REITs, Gilberto-Levy Historical
Mortgage Rate will be used as a proxy for the returns of debts held by REITs. Sector-Mix
Adjustment according to NCREIF sector weights. REIT index investment cost proxied by Vanguard
REIT fund expense (95-05) will be deducted from adjusted REIT equity index.
In this thesis, private real estate equity investment performance is represented by the MIT
Transaction Based Index (TBI) and NCREIF Property Index (NPI). Both TBI and NPI
returns are deducted by asset management fees estimated by the NFI-ODCE index
(NCREIF) over the same time period. Purpose of these adjustments is to improve
evaluation of publicly and privately held commercial real estate asset investment
performances relative to one another.
Preliminary comparison between NAREIT equity REIT index and NPI quarterly returns
from 1995-2005 was conducted to collect the mean return difference. Then the difference
after the treatments was compared to observe the effects of the author’s method.
The results demonstrate that at the aggregate level the difference between REIT and NPI
returns reduced from 1.08% to 0.74%, and the difference between REIT and TBI returns
reduced from 1.64% to 0.18%.
Analysis of Korean Real Estate Investment Trusts and Share Price Determinants
Haegyu Lee
Wonho Seo
Advisor: David Geltner, Professor, Real Estate Finance and Investment
Korean REITs started as CR-REITs, vehicles with specific objectives to relieve real estate liabilities
off the balance sheets of distressed companies and liquidize them back into the real estate market.
CR-REITs were finite-lived, closed-end, passively managed vehicles with public offerings heavily
weighed to institutional investors. Not only was REITs a new investment vehicle but CR-REITs and
its AMC were also brand new companies with no proven track records.
A finite-lived REIT has two sources of income, the first being monthly rental income which is paid out
as dividends and the second being the capital gain redistributed at reversion when the REIT is
terminated. Analysis shows that Korean REIT prices are more connected with appreciation earnings
than rental income earnings specifically due to their finite-lived, passively managed structure. Not to
be mistaken, average annual dividend yields were at historically around 9% giving them the highest
REIT returns in the Asian market.
This thesis aims to study the overall REITs market in Korea and conduct detailed analysis on REITs
stock price determinants using various factors in the Korean financial and real estate market.
Individual Korean REITs were analyzed in detail sorting out categories such as stock price,
shareholder characteristics, underlying assets, Net Asset Value, Earnings and Dividends. REITs
Linear regression analysis on Korean REIT stock returns were conducted to show performance
relation with the financial market. Further P/NAV analysis were focused on analyzing the different
P/NAV patterns and eventually developed into REIT price connected with its underlying assets,
especially with the appreciation value of the land. Additional analysis on Korean REIT P/E ratios
were conducted using various factors such as sales & lease back, buy-back options and asset
composition.
Low Income Housing Tax Credit Deals: Year Fifteen Restructuring Strategies
Lillian Lew-Hailer
Advisor: Lynn Fisher, Assistant Professor of Real Estate
This thesis examines how non-profit owners in Massachusetts have maintained affordability
and ownership of Low-Income Housing Tax Credit (LIHTC) properties after the initial
fifteen-year compliance period, at the lowest possible cost. The intent is two-fold: to inform
non-profit project sponsors about strategies leading to low-cost outcomes, and to advocate
for policies that promote such low-cost outcomes. The impacts of the players in LIHTC
deals, Massachusetts state policy, the original capital structure, and legal partnership
arrangements on the strategies that non-profit owners can pursue to maintain control of tax
credit properties are considered. Specific outcomes described include bargain sale and
charitable contribution, debt-plus-taxes or right of first refusal, and transfer of the limited
partnership interest. Themes include the tension between for- and non-profit partners,
public and private interests, and federal and state policies. Because the LIHTC is
administered on a state-by-state basis, the Massachusetts regulatory environment and state
housing resources play a central role in shaping disposition outcomes in the Commonwealth.
This thesis looks at how the recent lack of recapitalization funding for LIHTC properties has
revealed an opportunity for the Commonwealth to improve the existing HUD preservation
paradigm. Massachusetts’ previous policies and current political environment create an
opportunity for the state to promote new model of preservation that breaks from the federal
paradigm of prodigal public payments to investors. I recommend that the Commonwealth
prevents original, private investors from receiving additional public subsidy at the back end
of LIHTC deals by separating the disposition and recapitalization of properties.
Towards A New Real Estate: Innovative Financing for a Better Built Environment
Matthew J. Lister
Advisor: David Geltner, Professor of Real Estate Finance
The real estate industry has evolved significantly over the last century. This evolution has enabled the rise
of real estate to be one of the largest and most important asset classes in American investment. Yet this
evolution has also produced a system of development that has grown to compromise rather than facilitate
the creation of places of enduring value. First, this thesis explores how the evolution of the industry led to
this system. Second, this thesis asserts that the real estate industry has continued to evolve, and is on the
verge of adopting a new system of development, a New Real Estate, that will again facilitate the creation
of places of enduring value.
Following the current paradigm shift in American city planning, the New Real Estate acknowledges the
significant benefits of developing walkable mixed use urbanism. Despite the significant advances made in
the industry to design and entitle walkable mixed use urbanism, there has been little effort made to
facilitate it’s development in the field of real estate finance. Key to the continued evolution of the New
Real Estate, is the introduction and acceptance of several innovative financing concepts. This thesis
examines the potential roles of Patient Equity, Real Options Analysis, and the emerging U.S. Real Estate
Derivatives market in the evolving real estate industry.
A Comparative Study of Real Options Valuation Methods: Economics-Based Approach vs. Engineering-Based Approach
Shuichi Masunaga
Advisor: David Geltner, Professor of Real Estate Finance, Department of Urban Studies and Planning
It has been expected that the option valuation theory will play a much more significant role in the real estate analysis. However, potentially because of the need for understanding the advanced financial theories, the real options analysis has not been fully used in the real world. In order to attack this problem, it is highly desired to create a more practical and easily understandable calculation model for valuing flexibility.
With the increasing computational power of today, an interesting approach to valuing flexibility arises from the field of engineering systems. This approach does not require the understanding of advanced financial theories, and aims to assess the value of flexibility built into the project design. Although the perspective of this approach may be slightly different from that of traditional real options valuation approach, this approach might be an alternative method as a simpler model for valuing flexibility.
The comparative study of the economics-based approach and the engineering-based approach revealed that the latter approach has one critical problem in estimating the value of flexibility; the usage of a single risk-adjusted discount rate leads to either underestimation or overestimation of the real options value. Based on the results of a case study, this thesis proposes to use the engineering-based approach together with the economics-based approach. With its ability of comprehensive analysis and graphic presentation, the engineering-based approach has a great probability to make it easier for average practitioners to intuitively understand the value of flexibility.
The Impact of Climate Change on Ski Resort Operations and Development: Opportunities and Threats
Daniel D. D. McGill
Advisor: William C. Wheaton, Professor of Economics
This thesis serves as a pedagogical guide to the ski resort industry, and presents a broad overview
of the unique issues that accompany climate change. The paper also provides recommendations to
resort developers as to which regions of North America will likely become desirable destination
for skiers in light of such changes.
The ski resort industry is on the cutting edge with respect to sustainable building techniques and
adoption of innovative “green” principles in day-to-day operations. But while these efforts are
admirable and set an important precedent, in the global context they do little to stem the tide of
global warming which penalizes indiscriminately. It is therefore necessary for stakeholders within
the ski industry to not only embrace adoption strategies, but also to consider what preemptive
actions can be taken to capitalize on global warming.
Using historical annual total snowfall records and “skier visit” data, this study intends to quantify
the extent to which climate change has impacted resort operations in different regions of the
United States over the last several decades. In addition, the paper provides an overview of current
and future effects of climate change on North America’s ski resort industry and provides
recommendations as to how these operators can adapt to ever changing conditions over the next
30 – 50 years. This is followed by a review of climate adaptation practices currently employed
by resort operators and stakeholders.
With few exceptions, existing literature on this topic has neglected to consider what opportunities
might emerge as a result of climate change. While the field of climatology is an ever evolving
science, the ski industry would be wise to take note as global warming is likely to prove one of
those tectonic forces that gradually – but powerfully – changes the economic landscape in which
they operate.
GREEN LUXURY STUDENT HOUSING: A REAL ESTATE FEASIBILITY STUDY
Matthew E. Pace
Advisor: John F. Kennedy, Lecturer, Center for Real Estate
The primary purpose of this thesis is to estimate the demand for student housing that
focuses on upperclass undergraduate and graduate students who typically shy away
from dormitory housing. The initial chapters provide a brief introduction to conventional
student housing, explain why the market is growing, review the growing sustainability
trend and introduce the idea of green luxury student housing. Chicago serves as the
test market where more than forty universities currently operate. Methods for financing,
demand drivers, and overall feasibility are discussed for relevance to the market. Two
examples of recently built student housing projects in Chicago and Boston are reviewed
for current trends and components to their success.
Research conducted includes interviews with student housing developers, a student
housing consultant, academic staff and other project participants. Site visits, available
online data and reviews of project documentation supplement this research.
The thesis concludes with the expected demand believed to support the newly defined
market niche and its potential feasibility.
Mispricing Income Growth: Exploring Inefficiencies in Commercial Real Estate Pricing
Patrick D. Rowe
Advisor: William Wheaton, Professor of Economics
This paper is an investigation into the relationship between real estate capitalization rates and income growth. The paper includes a cross-sectional analysis of approximately 25 markets in the United States. The paper analyzes apartment and office markets separately, for two different periods of time. Multi-variable regression techniques are used to explore the relationships between cap rates in different markets and rent growth, appreciation, and employment growth, as well as Liquidity and Supply Constraint factors.
For this analysis, periods of time were chosen ranging from 1996 to 2002 so that subsequent rental growth, appreciation, and employment growth data was available. With this information, future growth of these variables is back tested. The results of the regressions are then compared to the theoretical relationships that should exist between cap rates and future income growth and appreciation. The results show that market pricing does not accurately price future income growth in a consistent manner. This provides significant evidence that the real estate capital market is inefficient in its pricing of assets in different markets based on the future rental behavior in individual markets.
The last aspect of the thesis is the development of an investment strategy that capitalizes on the inefficiencies discovered in the analysis. The strategy enables the investor to make investments that should demonstrate superior risk-adjusted returns based on the space market fundamentals in individual markets.
A Successive Effort on Performance Comparison Between Public and Private Real Estate Equity Investment
Jengbin Patrick Tsai
Advisor: Henry O. Pollakowski, Principal Research Associate
The research has a two-fold objective. Initially, the author compares the performance between public and private real estate equity investment represented by NAREIT Equity REIT Index and NCREIF Property Index from 1987 to 2005. Before comparison, the two return series are restated to eliminate their discrepancies in leverage, property-sector mix, and asset management fees. In addition to the 2.66% difference in mean returns between public and private markets over the 19-year research timeframe, the results indicate that the return restatement is able to reconcile the performance of the indices both by property sector (i.e. retail, apartment, office, and industrial) and at the aggregate level.
Subsequently, the author compares MIT CRE's Transactions-Based Index (TBI) with NCREIF Property Index in order to confirm the advantage of transaction- over appraisal-based indices under some circumstances. After TBI goes through a similar restatement process, TBI and NCREIF Property Index are respectively benchmarked with NAREIT Equity REIT Index from 1995 to 2005. Although some conflicting results are found in the retail and apartment sectors, the research basically identifies TBI's relative proximity to the public market benchmark, which further supports the argument that transaction-based indices are better data sources for the analyses in which responsive reflections on private market conditions are necessary.
Barriers to Growth in the US Real Estate Derivatives Market
Jani Venter
Advisor: Gloria Schuck, Lecturer, Department of Urban Studies and Planning
Commercial real estate is an important asset class but it does not yet have a well-developed
derivatives market in the United States. A derivative is a contract that derives its value from an
underlying index or asset. Examples of the most well-known derivatives that have been widely
used and traded for years are stock options, commodity futures and interest rate swaps. The
advent of direct real estate equity derivative products has created the opportunity for similar
applications in both the US and international commercial real estate markets.
The United States is currently experiencing a convergence between real estate and finance and it
appears that the real estate derivatives market might be ready to take off. The use of derivatives
could improve the functioning of the real estate industry by allowing investors to gain or reduce
exposure to the commercial real estate asset class without directly buying or selling properties.
The increased liquidity and reduced up front capital requirements provide added flexibility in
executing real estate investment strategies (i.e. speculating) and managing risk (i.e. hedging).
This has resulted in significant interest in the development of commercial property derivatives by
key players in all sectors. A number of barriers (e.g., indices, pricing, education, fund mandates,
tax and accounting treatment) still exist that hinder the successful implementation and growth of
real estate derivatives in the US commercial real estate market. It is crucial for the market to
overcome these barriers in order to revolutionize the institutional world and allow investors to
gain exposure to the real estate asset class and to hedge private real estate risk.
This thesis analyzes these barriers to the development of a synthetic market that is on the brink of
expanding. The US real estate sector is an eight trillion dollar market composed of real estate
assets which has been managed until recently without pointed focus on the property specific risk.
The size of this market presents a vast opportunity for risk hedging, asset allocation and portfolio
rebalancing in a more efficient manner through the use of derivatives.
The Implications of US Senior Housing to China
Yong Wang
Advisor: Brian Anthony Ciochetti, Professor of the Practice of Real Estate, Department of Architecture, Chairman, Center for Real Estate
In 2005, China had approximately 144 million people aged over 60, accounting for 11 percent of
the whole population. In 2010, this population will reach 1,700 million and consist of 12.78% of
the total population. It is also estimated that less than 200,000 seniors live in those not-for-profit,
non-government senior housing centers. This is 0.14% of total population of 144 million people
aged over 60 in 2005. If 3% of seniors may choose to live in a senior housing environment, it
will create an investment market of RMB90 billion to RMB100 billion. However, in China,
much foreign capital has been invested in real estate products such as office, residential, retail,
logistics, and hotel. Little capital has been deployed in senior housing. The for-profit senior
housing market is emerging as local developers have started to catch up the needs of the elderly
in China. None of them are sophisticated enough compared to senior housing owners and
operators in US. In China, the increased number of middle-class, and the rapid social and cultural
changes of traditional elderly care have demonstrated that the elderly’ great needs for better
quality of retirement life and experiences. The existing for-profit senior housing market in US
and both the for-profit and not-for-profit markets in China are discussed. Opportunities and
challenges to US developers/ investors as well as the implications of US senior housing to China
are analyzed. Several strategies are also proposed for potential US developers and/ or investors
to seriously look into this niche market in China now.
