A New Method to Estimate Risk and Return of Commercial Real Estate Assets from Cash Flows

摘要

We estimate the abnormal performance of real estate assets from cash flows to strengthen the position that open-end core real estate funds earn high (albeit levered) returns. We propose the use of detailed cash flows histories from the date of asset purchase (inception date) to the date of sale (liquidation date) plus the actual sale price, as well as appraised market values during the interim to determine a value for Jensen's alpha and beta for each investment made by an open-end core real estate fund. We examine how these Jensen's alphas are affected by (1) the rate of return from sector leverage, (2) the rate of return from incremental leverage, and (3) the rate of return from excess risk taking, and how the Jensen's alphas we estimate may overstate the "true" deal-level alpha. We offer an explanation that hinges on the observation that institutional investors prefer diversification over concentration of ownership due to their concern with minimizing portfolio risk.