Contrarian Theory And Real Estate Financing Finance Essay - Free Essay Example

The general research priorities intimated by most papers examining real estate investments could be summarized into five broad categories, namely; the responsibility of real estate in a mixed-asset portfolio, real estate and portfolio risk management, optimal resource allocation, performance measures for real estate; and diversification within real estate portfolios. Another aspect that needs to be highlighted on is that if long-term mean reversion exists in real estate markets, then it may be useful for developing long-term trading and hedging strategies. As per the Contrarian Theory, the real estate is an approximately 18 year high and low cycles. As the cycle begins to shift, a change in demand also follows. So the investor may cash out of the markets and re-invest his cash where the market swing is going. Although this theory reasserts the longevity in the real estate markets, the exact cycle time and demand movement are still under question and a degree of accuracy is essential for further evaluation. It is appropriate to mention again that the analysis of real-estate risk has typically focused on either the understatement of risk arising from the smoothed nature of appraisal-based returns or the systematic components of risk from an arbitrage pricing (APT) perspective. In contrast, little research exists on the volatility of total return using a model . Therefore, to plug the gap in real estate risk management a model will be developed by first decomposing total risk into expected and unexpected movements in asset prices. On the whole, real estate investments and portfolio diversification is plagued with certain inherent complexities which are further compounded by the need for large fund deployment, variability (uncertainty) in return, long term investments, and non-availability of good time series data. After doing the paper reviews of eminent researchers, I come to a conclusion that, in the past there have been a lot of researches on risks and financial aspects associated in strategic risk management for real estate business but none of them analyzed how to mitigate the dynamics of real estate market which, is one of my research objectives. Thus, work in the field has shown that there is still an inherent gap in knowledge in producing an effective model that takes into consideration, dynamic risk sharing specially for shared investment which is the core theme of my paper. Thus, the concept of risk-adjustment has been considered in varied aspects in some afore-mentioned studies, they fail to provide a useful insight on optimizing the risk-adjusted value of total return from a portfolio. Especially, the question of constructing a diversified private real estate portfolio has been mostly left unanswered or ignored although importance of this has been identified. Besides, there could be two aspects to risk and risk-adjustment, especially in the context of resource allocation. One is obviously risk regulation; the second is risk sharing within diversifications in investments. These form the basis for the development of risk-adjusted cum risk sharing dynamic model (Gupta, Cozzolino, 1974) elaborated upon in a subsequent Chapter. In contrast to investing in other markets as well as Tier II real estate where investment is converted to financial assets, it is suggested that many prefer private real estate investment as they are more influenced by the dual factors of control and ownership. Other reasons could explain the right side extremes in private real estate return distributions. The land component of real property is, theoretically, fixed in supply. In an urban setting with growth controls the supply is much more severely constrained.Atilde; Also, real estate investors may extend their holding periods. High transaction costs and site-speci?c ?nancing commit real estate investors to long holding periods. It is a popularly accepted in the real estate trade that time to sell is unpredictable hence analysis is all but impossible. Undoubtedly the exact date of sale is uncertain. Nevertheless, powerful probability statements can be made about time to sale, using even as simple a model as that used by this study. Ownership affects the real estate market. Since there is a separation of ownership and control, return on financial assets is less influenced by ownership. The private real estate investment market may be opposite. Furthermore, the research on time to selling showed that the correlation and reversion parameters were found to vary substantially among metro areas. The information costs and the supply costs appeared to have had a large impact on the reaction of a metro area to shocks in the equilibrium price. Also it concluded that high real income growth boosted serial correlation and mean reversion, although the former about three times as much as the latter. High construction costs, on the other hand, raised correlation and lowered reversion. High serial correlation caused house prices to rise significantly beyond their equilibrium and eventually to a decline in prices. Through the literature reviewed contains significant data to prove the respective hypothesis, the portfolio selection and the risk has not been adequately addressed. Especially, the time of buying a product in real estate portfolio and selling of the same using the mean-variance framework for the risk-adjusted return of the port folio have not been substantially argued upon. Thus, in this thesis to conclude, in this thesis the dynamic properties of housing markets, specific to the given time and location, which is a gap and which has never been addressed will be considered. With the studies that this thesis highlights, it is hoped to shed new light into the field, so that researchers of the future can not only implement the new model, but also to revaluate current opinions on real estate management strategy. Especially, although, Pyhrr et al (1990) have considered real assets as good hedge in times of inflation and developed specific real estate investment strategies which deal with inflations cycles, their analysis lacks consideration of VaR and consequent incorporation of sharing concept in designing operational strategies for acquisition and disposition of real assets. As I proceed with my research more I will study more literatures on the subject matter. The whole idea will be to validate my previous statements that there is a gap in the area . In the past decade, there has been a steady expansion of private investment vehicles. According to Baum (2002) these investment opportunities have grown from slightly less than 1 billion euros in 1991 to 80 billion euros in 2002. With expansion of investment, the risk factor is also multiplied. Over the years, the researches point out that, investment decisions should not be made solely on a geographical basis. Besides, there could be two aspects to risk and risk-adjustment, especially in the context of resource allocation. One is obviously risk regulation; the second is risk sharing within diversifications in investments. Over the past 20 years, a significant amount of research focusing on direct international real estate an alternative asset has been completed. As the availability and quality of data have increased over time, studies have expanded to include more sophisticated analysis but there are very few research have been conducted to fill the gap on the strategic Risk Management for Shared real estate investment. My research will attempt to fill the gap by providing strategies to Risk Management for Real Estate Shared Investment. This will be done by analyzing the data over a period of number of years and hopefully this dissertation will contribute a meaning-full methodology on strategic risk analysis.