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Real Estate Investment and Finance:
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David Hartzell
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Real Estate
Investment
Real Estate
Investment
Strategies, Structures, Decisions
ANDREW BAUM
DAVID HARTZELL
Second Edition
This edition first published 2021
© 2021 Andrew Baum and David Hartzell
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Library of Congress Cataloging-in-Publication Data
Names Baum, Andrew E., author. Hartzell, David, author.
Title Real estate investment strategies, structures, decisions Andrew
Ellis Baum, David John Hartzell.
Description Second Edition. Hoboken Wiley, 2020. Series Wiley
finance Includes index.
Identifiers LCCN 2020020370 (print) LCCN 2020020371 (ebook) ISBN
9781119526094 (hardback) ISBN 9781119526063 (adobe pdf) ISBN
9781119526155 (epub)
Subjects LCSH Real estate investment.
Classification LCC HD1382.5 .B3784 2020 (print) LCC HD1382.5 (ebook)
DDC 332.6324—dc23
LC record available at httpslccn.loc.gov2020020370
LC ebook record available at httpslccn.loc.gov2020020371
10 9 8 7 6 5 4 3 2 1
Cover Design: Wiley
Cover Image: © piranka/Getty Images
Set in STIX Two Text 10/12 by SPi Global
Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK
To Randee Hartzell and Karen Baum for their unfailing support
To Jamie and David Hartzell Jr and to David, Daniel and Josie Baum for helping us to
understand the important things in life
Contents
Acknowledgements xxi
About the Authors xxiii
Preface xxv
PART ONE
Real Estate as an Investment: An Introduction
CHAPTER 1
Real Estate – The Global Asset 3
1.1 The Global Property Investment Universe 3
1.2 Market Players 6
1.2.1 Investors 6
1.2.2 Fund Managers 9
1.2.3 Advisors 9
1.3 Property – Its Character as an Asset Class 11
1.3.1 Property Depreciates 12
1.3.2 Lease Contracts Control Cash Flows 13
1.3.3 The Supply Side is Inelastic 13
1.3.4 Valuations Influence Performance 14
1.3.5 Property is Not Liquid 15
1.3.6 Large Lot Sizes Produce Specific Risk 16
1.3.7 Leverage is Commonly Used in Real Estate Investment 18
1.3.8 Property Appears to be an Inflation Hedge 19
1.3.9 Property is a Medium-Risk Asset 21
1.3.10 Real Estate Cycles Control Returns 22
1.3.11 Property Appears to be a Diversifying Asset 24
Specific Risk 27
Leverage 27
Illiquidity 28
Taxes, Currency, and Fees 28
1.4 Conclusion 28
vii
viiiContents
CHAPTER 2
Global Property Markets and Real Estate Cycles, 1950–2020 33
2.1 Introduction and Background 33
2.1.1 The Property Cycle 33
2.2 A Performance History 34
2.2.1 Before 1970: Real Estate Becomes a Medium-Return Asset 34
2.2.2 The 1970s: Inflation, Boom, and Bust 36
The USA 36
The UK 37
2.2.3 The 1980s: New Investors Flood the Real Estate Capital Market 38
The USA 38
The UK 42
2.2.4 The 1990s: The Rise of REITs 43
The USA 43
The UK: Deep Recession, Low Inflation, and Globalization 45
2.2.5 2002–7: A Rising Tide Lifts All Boats 47
The USA 47
The UK 59
2.2.6 The Global Real Estate Credit Crisis Hits 60
The USA 60
The UK 67
2.2.7 The Markets Recover Post-crisis 70
2.3 The Global Market 72
2.3.1 The European Market Develops 72
2.3.2 Asia Emerges 75
2.4 Real Estate Cycles: Conclusion 80
Lesson 1: Too Much Lending to Property is Dangerous 80
Lesson 2: Yields are Mean-Reverting – Unless Real
Risk-Free Rates Change 81
Lesson 3: Look at Yields on Index-Linked 81
CHAPTER 3
Market Fundamentals and Rent 83
3.1 Introduction: The Global Property Cycle and Rent 83
3.2 The Economics of Rent 84
3.2.1 Rent and Operational Profits 84
3.2.2 Theories of Rent 86
Ricardo 86
von Thünen 87
Fisher 89
3.2.3 Rent as the Price of Space 90
3.2.4 Supply 91
3.2.5 Demand 93
The Cyclical Demand for Space 93
The Structural Demand for Space 94
Variations in Locational Demand by Use 95
Contents ix
3.2.6 The Relationship Between Rental Value and Rental Income 97

3.2.7 The Impact of Currency Movements on Rent 99
3.2.8 Property Rents and Inflation 99
3.3 Forecasting Rents 101
3.3.1 Forecasting National Rents 101
Model Types 101
Price 102
Demand 102
Supply 102
Building the Model 104
An Historical Model 104
A Forecasting Model 105
3.3.2 Forecasting at the Local Level 105
Conceptual and Modelling Problems 106
Data Issues 106
3.4 Conclusion 107
CHAPTER 4
Asset Pricing, Portfolio Theory, and Real Estate 109
4.1 Risk, Return, and Portfolio Theory 109
4.1.1 Introduction 109
4.1.2 Risk and Return 110
4.1.3 Portfolio Theory 111
The Efficient Frontier 111
4.1.4 Risk and Competitors 112
4.1.5 Risk and Liabilities 113
4.1.6 Property Portfolio Management in Practice 113
The Investment Strategy 114
4.2 A Property Appraisal Model 115
4.2.1 Introduction: The Excess Return 115
4.2.2 The Cap Rate or Initial Yield – A Simple Price Indicator 116
UK Terminology 116
US Terminology 117
How are Cap Rates Estimated in Practice? 118
Cap Rates are the Inverse of Price/Earnings Ratios 118
What Drives the Cap Rate? 119
4.2.3 The Fisher Equation 121
4.2.4 A Simple Cash Flow Model 121
4.2.5 Gordon’s Growth Model (Constant Income Growth) 122
4.2.6 A Property Valuation Model Including Depreciation 122
4.3 The Model Components 123
4.3.1 The Risk-Free Rate 123
4.3.2 The Risk Premium 124
What is Risk? 124
The Capital Asset Pricing Model 125
4.3.3 Inflation 127
xContents
4.3.4 Real Rental Growth 128

4.3.5 Depreciation 128
4.3.6 ‘Correct’ Yields 129
4.3.7 An Analysis in Real Terms 129
4.4 The Required Return for Property Assets 130
4.4.1 The Sector Premium 130
4.4.2 The City Premium 131
4.4.3 The Property Premium 131
4.4.4 Example 131
Tenant 131
Tenure 132
Leases 132
Building 132
Location 132
4.5 Forecasting Real Estate Returns 135
4.5.1 The Origin and Uses of Property Forecasts 135
4.5.2 Forecasting Cap Rates 136
4.5.3 Forecasting Property Cash Flows 138
4.5.4 The Portfolio Model 138
4.5.5 Example 139
4.5.6 Fair Value Analysis 141
4.6 Conclusion: A Simple Way to Think About Real Estate Returns 141
PART TWO
Making Investment Decisions at the Property Level
CHAPTER 5
Basic Valuation and Investment Analysis 145
5.1 Introduction 145
5.1.1 Cash Flow 146
5.1.2 Risk and the Discount Rate 147
5.1.3 Determining Price 147
5.1.4 Determining Return 148
5.2 Estimating Future Cash Flows 148
5.2.2 Holding Period 149
5.2.3 Lease Rent 149
5.2.4 Resale Price 149
Estimated Rental Value at Resale 150
Going-Out Capitalisation Rate 150
5.2.5 Depreciation 150
5.2.6 Expenses 152
Fees 152
Taxes 152
Debt Finance (Interest) 153
Contents xi
5.3 The Discount Rate 153

5.4 Conclusion 156
CHAPTER 6
Leasing 159
6.2 Legal Characteristics of Leases 160
6.3 The Leasing Process 161
6.4 Important Economic Elements of a Lease 161
6.4.1 The Term of the Lease 162
6.4.2 Base Rent and Rent Escalation Provisions 162
6.4.3 Options 163
Renewal Options 163
Expansion, Contraction, and Termination Options 163
6.4.4 Measurement of Space 164
6.4.5 Expense Treatment 165
Gross Lease 165
Triple Net Lease 168
6.4.6 Concessions: Tenant Improvement Allowance and
Rental Abatement 170
Tenant Improvement Allowance or Tenant Upfit/Fitout 170
Rental Abatement (Rent-Free Periods) 171
6.4.7 Brokerage Commissions 172
6.4.8 Other Key Elements of a Lease 174
6.4.9 Leasing Differences Across Property Types 175
6.5 Lease Economics and Effective Rent 177
6.5.1 Comparing Leases with Different Expense Treatment 177
The Landlord’s Perspective 177
The Tenant’s Perspective 178
6.5.2 Comparing Leases with Different Concession Allowances 179
Landlord’s Perspective 180
Tenant’s Perspective 181
6.6 Conclusions 183
Appendix: Modeling Lease Flexibility In The Uk 183
Example 185
Assumptions 185
Result 185
Explanation 186
CHAPTER 7
Techniques for Valuing Commercial Real Estate and Determining
Feasibility: The Unleveraged Case 187
7.2 Background on the Investment Opportunity 188
7.2.1 Project Details 188
7.2.2 Where Do You Find Information About
Income and Expenses? 189
xiiContents
7.3 Developing a Pro Forma Income Statement 190

7.3.1 Calculating Total Revenues 191
7.3.2 Estimating Vacancy Loss 191
7.3.3 Estimating Operating Expenses 192
7.3.4 Calculating Net Operating Income 193
7.4 Valuation Using Net Operating Income:
Single-Year Cash Flow 193
7.4.1 An Aside on Capitalization Rates 194
Estimating the Market Cap Rate 194
Cap Rates are the Inverse of Price/Earnings Ratios 195
Using Cap Rates to Value the Apartment Project 195
Calculating the Implied Cap Rate for the Apartment
Investment Opportunity 196
7.5 Investment Analysis Using Operating Income: Multiple-Year
Cash Flows 197
7.5.1 Operating Cash Flows from Leasing 197
7.5.2 Cash Flows from Disposition 198
7.6 Applying Discounted Cash Flow to Analyze
Investment Feasibility 200
7.6.1 Determining Feasibility 200
7.6.2 Equity Multiple 200
7.6.3 Partitioning the Internal Rate of Return 201
7.6.4 Calculating the Maximum Price to Pay 202
7.7 Sensitivity Analysis 202
7.8 Conclusion 203
CHAPTER 8
Mortgages: An Introduction 205
8.2 What is a Mortgage? 206
8.2.1 Promissory Note 206
8.2.2 Mortgage Instrument 206
8.3 The Risks and Returns of Mortgage Investment 207
8.4 The Financial Components of a Mortgage 208
8.4.1 The Bond Component 208
8.4.2 The Call Option Component 208
8.4.3 The Put Option Component 209
8.5 The Mortgage Menu 210
8.5.1 Fixed or Floating-Rate Loans 210
8.5.2 Fully or Partially Amortizing Loans 211
8.6 An Introduction to Mortgage Math 212
8.6.1 Calculating the Monthly Payment 212
8.6.2 The Mortgage Loan Constant 213
8.6.3 The Amortization Schedule 213
Contents xiii
8.6.4 Converting from the Contract Rate to the

Compounded Rate 217
8.6.5 Determining the Cost of Borrowing 217
Borrowing Cost without Up-front Fees 217
Borrowing Costs when the Lender Charges Fees 219
Borrowing Costs when the Loan is Prepaid Prior to Maturity 220
8.7 Calculating Prepayment Penalties 220
8.7.1 Lockout Periods 221
8.7.2 Step-down Prepayment Penalties 221
8.7.3 Yield Maintenance Penalties and Yield Calculations 222
8.7.4 Treasury Flat Prepayment Penalty 225
8.7.5 Defeasance 228
8.8 Conclusion 228
CHAPTER 9
Commercial Mortgage Underwriting and Leveraged
Feasibility Analysis 229
9.2 Mortgage Underwriting and the Underwriting Process 229
9.2.1 Ratios and Rules of Thumb 230
Loan-to-Value Ratio 230
Debt Coverage Ratio 230
Debt Yield 232
9.2.2 Determining the Maximum Loan Amount 232
Operating Expense Ratio 236
Breakeven Ratio 236
Debt Yield 237
9.3 Investment Feasibility with Leverage:
Before-Tax Analysis 238
9.3.1 The Two-Part Nature of Cash Flows: Operating Income
and Disposition Income 238
9.3.2 Financing Impact on Investor Income Statements: Adding
Debt Service Cash Flows 238
Income from Disposition 239
9.3.3 Determining Investment Feasibility: The Leveraged
Before-Tax Case 240
Static or Single-Year Measures of Investment Performance 240
Determining Investment Feasibility Using Multiple
Year Cash Flows 242
Equity Multiple 242
Partitioning the IRR and NPV 242
Determining the Maximum Price to Pay with Leverage 243
9.4 Sensitivity Analysis 244
9.5 Conclusion 245
xivContents
CHAPTER 10
Real Estate Development 247
10.2 The Development Process 248
10.3 Preliminary Analysis of “The Station” Development 250
10.3.1 “Back-of-the-Envelope” Analysis 250
Estimating Construction Costs 251
Estimating Market Value 251
10.3.2 Adding Construction Financing 253
10.3.3 Sensitivity Analysis 254
10.4 Formal Analysis of Development of “The Station” 257
10.5 Budget for “The Station” Office Project 258
10.6 Financing Development 259
10.6.1 Stage One: Pre-construction 260
10.6.2 Stage Two: Construction 260
Construction Loan Calculations 260
10.6.3 Stage Three: Lease-Up 263
10.6.4 Stage Four: Operations 264
Lender Yield Calculation for the Construction Loan 264
10.7 Developer Profit and Return 265
10.8 Comparison to “Back-of-the-Envelope” Analysis 266
10.9 A London Office Development Through the Cycle 267
10.10 Conclusion 274
PART THREE
Real Estate Investment Structures
CHAPTER 11
Unlisted Real Estate Funds 277
11.1 Introduction to Unlisted Real Estate Funds 277
11.1.1 The US Market 278
11.1.2 The Global Market 278
11.2 The Growth of the Unlisted Real Estate Fund Market 280
11.2.1 The Global Unlisted Property Market Universe 281
11.2.2 How Much Global Real Estate is in Unlisted Funds? 283
11.3 Unlisted Fund Structures 284
11.3.1 Open-Ended Funds 285
11.3.2 Closed-Ended Funds 286
11.3.3 Funds of Funds 287
11.4 Characteristics of Unlisted Real Estate Funds 288
11.4.1 Style 288
11.4.2 Investment Restrictions 289
11.4.3 Property Sector and Geographic Focus 290
Contents xv
11.5 Liquidity and Valuation Issues 291

11.5.1 Liquidity 291
11.5.2 Valuation 294
11.6 The Case for and Against Unlisted Real Estate Funds 294
11.6.1 The Case for Unlisted Real Estate Funds 294
Unlisted Real Estate Funds can Diversify
Real Estate-Specific Risk 294
Unlisted Funds are Priced by Reference to NAV 294
Unlisted Funds Provide Access to Specialist Managers 295
11.6.2 The Case Against Unlisted Real Estate Funds 295
The Drawdown Profile 295
Gearing and the J-curve Effect 296
Fees and Performance Persistence 297
Do Trading Prices Track NAV? 297
11.7 Conclusion 300
CHAPTER 12
Real Estate Private Equity: Fund Structure
and Cash Flow Distribution 301
12.1 Introduction: The Four Quadrants and Private Equity 301
12.2 Private Equity Fund Background 303
12.3 The Lifecycle of a Private Equity Fund 304
12.3.1 Initial Fundraising 304
12.3.2 Acquisition Stage 305
12.3.3 Asset Management 306
12.3.4 Portfolio Management 306
12.3.5 End of Fund Life 307
12.4 Fund Economics 307
12.4.1 Management Fees 307
12.4.2 Limited Partner Distributions 307
Return of Initial Capital 308
Preferred Return 308
Carried Interest 308
Promoted Interest 309
12.5 Waterfall Structures 310
12.5.2 Pro-rata Investment and Distribution 311
12.5.3 All Equity Provided by Limited Partner, 80%/20%
12.5.4 Adding a Preferred Return 312
12.5.5 Return of Capital, Simple Interest Preferred Return,
Adding Management Fees 316
12.5.6 Return of Capital, Compounded Interest Preferred
Return, Carried Interest 317
xviContents
12.6 Private Equity Structures in the Credit Crisis 319

12.7 Conclusion 321
CHAPTER 13
Listed Equity Real Estate 323
13.2 REITs and REOCS 324
13.3 Listed Funds and Mutual Funds 324
13.4 Exchange-Traded Funds 325
13.5 The US REIT Experience 325
13.5.2 Distributions 326
13.5.3 Measuring REIT Net Income 327
Defining Net Income 327
Funds from Operations 329
13.5.4 Performance 332
Summary 335
13.6 The Global Market 335
13.6.1 The Global Property Company Universe 335
13.6.2 The Global REIT Universe 335
13.6.3 The UK REIT 338
13.7 REIT Pricing 339
13.7.1 Using Earnings to Value REITs 339
13.7.2 Market Capitalization and Net Asset Value 340
13.7.3 Premium or Discount to NAV? 340
Instant Exposure 341
Liquidity/Divisibility 342
Asset Values are Higher than the Reported NAV 342
Projected Asset Values are Expected to Exceed the
Reported NAV 342
Management Skills 342
Tax 343
Debt 343
13.8 Conclusion 343
CHAPTER 14
Real Estate Debt Markets 345
14.2 A Brief History Lesson 347
14.2.1 Banking in the 1960s and 1970s 347
14.2.2 The Volcker Era of High and Volatile Interest Rates 349
14.3 Wall Street Act I: The Early Residential
Mortgage-Backed Securities Market 349
14.3.1 The Securitization Process Explained 350
14.3.2 Lender Profitability from Securitization 353
Contents xvii
14.4 Wall Street Act II: Senior-Subordinated Securities,

the Advent of Structured Finance 354
14.4.1 The Coast Federal Savings and Loan Deal 354
14.4.2 Risk and Return Characteristics of the Senior-Subordinated
Structures 358
14.5 Wall Street Act III: The Evolution of Structured Finance 359
14.5.1 An Updated Look at the Senior-Subordinated Security 359
14.5.2 Who Profits from these Transactions? 362
14.6 Collateralized Debt Obligations 363
14.7 Mezzanine Debt 365
14.7.1 Mezzanine: The Background 365
14.7.2 Mezzanine Structures 366
14.7.3 A UK Example 368
14.8 Whole Loans and Synthetic Mezzanine 368
14.9 Income Strips 369
14.10 Cash-out Refinancing 371
14.11 All Good Things Must Come to an End 373
14.11.1 The Cash-out Refinancing Example Extended 374
14.12 Post-crisis Recovery 381
14.12.1 A Final Update to the Cash-out Refinancing Example 382
PART FOUR
Creating a Property Investment Portfolio
CHAPTER 15
Building the Portfolio 387
15.1 The Top-Down Portfolio Construction Process 387
15.1.2 Risk and Return Objectives 390
The Relative Return Target 392
The Absolute Return Target 393
15.1.3 Benchmarks 394
15.2 Strengths, Weaknesses, Constraints: Portfolio Analysis 394
15.2.1 Current Portfolio Structure 394
15.2.2 Strengths, Weaknesses, Constraints 395
15.2.3 Structure and Stock Selection 395
15.3 Portfolio Construction 397
15.3.1 Top-Down or Bottom-Up? 397
15.3.2 Mixing Listed and Unlisted Real Estate 398
15.3.3 Can Real Estate Investors Build Efficient Portfolios? 400
15.3.4 Possible Approaches 403
Case 1: Large US Endowment Fund 403
Case 2: UK Family Office 406
15.4 Conclusion 409
xviiiContents
CHAPTER 16
International Real Estate Investment: Issues 411
16.1 I ntroduction: The Growth of Cross-Border Real Estate Capital 411
16.2 The Global Real Estate Market 413
16.2.1 The Global Universe 413
16.2.2 Core, Developing, Emerging 413
16.2.3 Transparency 414
16.2.4 The Limits to Globalisation 414
16.3 The Case for International Real Estate Investment 415
16.3.1 The Case for International Real Estate Investment:
Diversification 415
16.3.2 The Case for International Real Estate Investment:
Enhanced Return 417
16.3.3 Other Drivers of International Property Investment 418
16.4 The Problems 419
16.4.2 Index Replication and Tracking Error 419
16.4.3 Leverage 420
16.4.4 Global Cycles, Converging Markets 420
16.4.5 Execution Challenges 421
16.4.6 Loss of Focus and Specialisation 421
16.5 Formal Barriers 421
16.5.1 Legal Barriers 421
16.5.2 Capital Controls 422
16.5.3 Tax 422
16.6 Informal Barriers 425
16.6.2 Currency Risk 425
16.6.3 Legal and Title Risk 426
16.6.4 Liquidity Risk 427
16.6.5 Geographical Barriers 427
16.6.6 Political Risk 428
16.6.7 Cultural Barriers 428
16.6.8 Information Asymmetry 429
16.7 A Pricing Approach for International Property 429
16.7.1 Example 429
16.7.2 Theories of Interest Rates and Exchange Rates 431
The Law of One Price 431
Absolute Purchasing Power Parity 431
Relative Purchasing Power Parity 432
The Monetary Model of Exchange Rates 432
The Fisher Equation 432
Interest Rate Parity 432
Putting Relative Purchasing Power Parity and Interest
Rate Parity Together with the Fisher Equation 432
Contents xix
16.7.3 Putting Theory into Practice 433

16.7.4 Using Local Excess Returns 438
16.8 Managing Currency Exposure and Currency Risk 441
16.8.1 Diversifying 442
16.8.2 Using a ‘Currency Overlay’ 442
16.8.3 Using Local Debt 443
16.8.4 Hedging Equity 444
16.8.5 Leverage, Tax, and Fees 446
16.9 Building a Portfolio 447
CHAPTER 17
Performance Measurement and Attribution 451
17.1 Performance Measurement: An Introduction 451
17.2 Return Measures 452
Income Return 453
Capital Return 453
Total Return 453
Time-Weighted Return 454
Internal Rate of Return 454
17.2.2 Example: IRR, TWRR, or Total Return? 454
IRR or TWRR? 456
IRR or Total Return? 456
17.2.3 Required and Delivered Returns 456
The Required Return 456
The Delivered Return 458
17.2.4 Capital Expenditure 459
Timing of Expenditure 460
17.2.5 Risk-Adjusted Measures of Performance 460
17.3 Attribution Analysis: Sources of Return 462
17.3.1 Changes in Initial Yields 462
17.3.2 The Combined Impact 464
17.4 Attribution Analysis: The Property Level 465
17.5 Attribution Analysis: The Portfolio Level 467
17.5.2 The Choice of Segmentation 468
17.5.3 Style 469
17.5.4 Themes 470
17.5.5 City or Metropolitan Statistical Area Selection 471
17.5.6 Two or Three Terms? 471
17.5.7 The Formulae 472
17.5.8 Results from Different Attribution Methods 473
Case 1 474
Case 2 474
xxContents
17.6 Attribution and Portfolio Management: Alpha and Beta 474

17.6.1 Alpha and Beta Attribution: An Introduction 474
17.6.2 Sources of Alpha and Beta 476
17.7 Performance Measurement and Return
Attribution for Property Funds 477
17.7.2 The Asymmetry of Performance Fees 478
17.7.3 An Attribution System for Funds 480
17.7.4 Alpha and Beta in Property Funds: A Case Study 482
17.7.5 Unlisted Fund Performance: Empirical Evidence 485
The Data 485
Relative Returns 486
Alpha and Beta 486
Timing: IRR and TWRR 488
IRRs and Vintage Year 488
17.8 Conclusion 489
CHAPTER 18
Conclusions 491
18.1 Why Property? 491
18.2 Lessons Learned 493
18.2.1 Liquid Structures 493
18.2.2 Unlisted Funds 494
18.2.3 International Investing 495
18.2.4 Best-Practice Real Estate Investing 495
18.2.5 Pricing 496
18.3 The Future 496
18.3.1 The PropTech Explosion 496
18.3.2 Smart Buildings and ESG 499
18.3.3 Occupier Markets: Space as a Service 499
18.3.4 Fractionalization and Liquidity 500
Liquidity and Faster Transactions 500
Tokenization and Fractionalization 502
18.3.5 Derivatives 502
18.4 Conclusion 504
References 509
Glossary 515
Index 527
Acknowledgements
W e would like to thank many people without whom this book could never have been
written. These are primarily our professional colleagues at Salomon Brothers,
Heitman, Highwoods Properties, Prudential, Henderson, Invesco, and CBRE Investors,
and our students. This means, primarily, our MBA students based at the Kenan-Flagler
Business School at the University of North Carolina, the Saïd Business School at the
University of Oxford, and the Judge Business School, University of Cambridge, as well
as our students on the University of Reading MSc Real Estate course. In addition, our
ideas have been corrected by our academic colleagues at UNC, Reading, Cambridge,
and Oxford.
Some of the material in this book has appeared in a similar form in Andrew Baum’s
Commercial Real Estate Investment: A Strategic Approach (Elsevier), which was written
in 2009 largely for a UK readership. In preparing much of the material both in this pre-
decessor work and the new book, we have been very fortunate to have had the help of
expert co-authors. The following have been especially helpful.
Graeme Newell of the University of Western Sydney contributed material about
Australia and the box on sovereign wealth funds in Chapter 1. Nadja Savic de Jager,
Shane Taylor, and Isaac Carrascal of CBRE Global Investors wrote about the continen-
tal European and Asian markets in Chapter 2. Yu Shu Ming and Ho Kim Hin of the
National University of Singapore helped us with material about Asian markets, espe-
cially in Chapter 2. Ehsan Soroush and Nick Wilson contributed the box about Dubai
in Chapter 2. Sabina Kalyan wrote the section on the economics of rent in Chapter 3,
and Bryan MacGregor of the University of Aberdeen developed some of the forecasting
material in Chapter 3. Andrew Schofield of Henderson Global Investors contributed
many of the ideas in Chapter 4; Neil Crosby of the University of Reading is co-author
of parts of Chapter 5; and Kieran Farrelly of CBRE Investors wrote parts of Chapters 13
and 17. Claudia Beatriz Murray of the University of Reading contributed part of Chap-
ter 15. Tony Key contributed part of Chapter 17. Andrew Baum worked with Andrew
Petersen of K&L Gates on the text Real Estate Finance: Law, Regulation & Practice
(LexisNexis, 2008), which provided the basis for the Glossary.
In addition, we would like to thank Alex Moss, Gary McNamara, Steven Devaney,
James Boyd-Philips, Daniel Baum, Jamie Hartzell, David Hartzell, Jr., Peter Struempell,
Malcolm Frodsham, and Matt Richardson.
Andrew Baum would like to thank his partners at Real Estate Strategy, OPC and
Property Funds Research, including Jeremy Plummer, now of CBRE Global Investors,
who helped to develop many of the ideas in Chapters 15 and 16, and Nick Colley and
Jane Fear, who provided many of the second edition updates.
xxi
xxiiAcknowledgements
David Hartzell would like to thank David Watkins, with SHA Capital Partners
( formerly with Heitman Capital Management) in Chicago, for helping develop intuition
during the many hours and years spent discussing all aspects of the real estate industry,
as well as his former and current colleagues at the University of North Carolina and at
the Wood Center for Real Estate Studies. Thanks also go to Brent Morris and Tim Wang
at Clarion Investment for their help with data and analysis. Without the feedback, sup-
port, and good humor of thousands of MBA students at Kenan-Flagler, this book would
not have been written, and life would not be nearly as much fun. Particular thanks are
due to those students who helped with editing and spreadsheet development, including
John Clarkson, Mike Aiken, Alexis Lefebvre, Heather Moylan, and Adam Hyder for the
first edition, and Andrew Shrock, Rich Dougherty, Elliot Salman, Will McGuire, Mark
Matthews, Colin Hartley, Paul Bode, and Zach Spencer for the second edition.
About the Authors
David Hartzell joined the faculty at the University of North Carolina in July 1988.
During his tenure at UNC, he has taught finance and real estate courses in the under-
graduate, MBA, PhD, and Executive Education Programs. He has received teaching
awards at the undergraduate level at UNC, and at the MBA level at the University of
Texas and at UNC.
Dave is the Steven D. Bell and Leonard W. Wood Distinguished Professor of Finance
and Real Estate. He has served for most of his years at UNC as the coordinator of the
Real Estate Concentration within the UNC MBA Program. In addition, he serves as the
Director of the Wood Center for Real Estate Studies (www.realestate.unc.edu). He is
also a Fellow of the Private Equity Research Consortium at the Kenan Institute.
He serves on the Board of Directors of Highwoods Properties, a publicly traded
Real Estate Investment Trust (REIT) that invests in and develops office buildings. He
serves on the Investment Committee and the Audit Committee. He is the faculty advi-
sor and also serves on the Board of the UNC Real Estate Investment Fund, the first and
only true student-managed real estate private equity fund. He was also appointed to the
Investment Advisory Committee of the $100 billion North Carolina Retirement System
by the NC State Treasurer in 2011.
Dave is a former vice president at Salomon Brothers Inc. in New York, where his
primary focus was on institutional real estate finance and investments. Dave has worked
with numerous international companies on a consulting basis, most notably Heitman
Capital Management in Chicago, with whom he was affiliated from 1994 to 2010.
He received his PhD in Finance from the Business School at UNC-Chapel Hill and
his MA and BS in Economics from the University of Delaware, receiving the Distin-
guished Alumni Award from the University of Delaware in 2000.
Andrew Baum is Professor of Practice at the Saïd Business School, Univer-
sity of Oxford and Professor Emeritus at the University of Reading. He was Honor-
ary Professor of Real Estate Investment at the University of Cambridge 2009–14, and
Fellow of St John’s College, Cambridge 2011–14. He is Chairman of Newcore Capital
Management, a real estate fund manager focused on alternatives, and advisor to several
property organisations. He has held senior executive and non-executive positions with
Grosvenor, The Crown Estate, CBRE Global Investors, and others. He was hired as the
first director of property research for Prudential in 1987. He founded RES (a property
research company) in 1990 and sold the business to Henderson Global Investors in
1997. At that time he became Chief Investment Officer (Property) at Henderson and
later Director of International Property. In 2001 he founded OPC, a property research
and investment company, which was sold to CBRE Investors to create CBRE Global
Investment Partners, which now has over $30bn of assets under management.
xxiii
xxiv About the Authors
He holds BSc, MPhil, and PhD degrees from the University of Reading, and is a
graduate of the London Business School investment management programme, a char-
tered surveyor and a qualified member of the CFA Institute (ASIP). He is the author
of over 50 refereed journal papers and book chapters. PropTech 3.0: The Future of Real
Estate is the most downloaded Saïd Business School, University of Oxford report.
Baum, currently Director of the Oxford Future of Real Estate Initiative, was voted
one of the top 3 most influential people in PropTech in the 2017 Lendinvest list and
was winner of the UK PropTech Association Special Achievement award for 2019. He
is founder and former president of the Reading Real Estate Foundation, an educational
charity established to support real estate education. He was elected Academic Fellow of
the Urban Land Institute in 2001, the first such election outside the USA, and Honorary
Fellow of the Society of Property Researchers in 2002.
Andy and Dave are both married to their high school sweethearts, are both proud
parents and (now, since the first edition) grandparents. Both played university soccer,
Dave as a starter on the Division I Blue Hen soccer team at the University of Dela-
ware, Andy for British Universities. Both play old timey mandolin less well than they
would like.
Preface
I t is a difficult challenge in a book like this which combines finance, law, and real estate
to avoid over-complication while at the same time preventing over-simplification.
This challenge is amplified many times when adopting a global perspective. In
addition to periodic shocks and crashes (the latest of which, COVID-19, has shaken
the foundations of real estate markets and challenged the globalization of finance),
there are many different systems controlling land ownership; different approaches to
investment regulation; different tax and accounting regimes; and a myriad of structures
underpinning investment vehicles. To attempt to extract some global truths from this
web could be regarded as over-ambitious. In deliberately adopting a global perspective,
we must acknowledge the lens through which we view this world, which is designed in
the UK and the USA, continental Europe and Asia, in that order.
Happily, increasing globalization allows some generalization from one US-based
author and one European. We have been lucky to have worked together enough to
know how and where to jump over the language barrier. The most widely accepted real
estate transparency index (Jones Lang LaSalle, 2010) ranks, largely on the grounds of
information availability, the UK and the USA in the top group of all global markets,
with Canada, Australia, New Zealand, and Sweden. The longest, most detailed, and
most heavily analysed datasets describing real estate performance in the modern era
exist in the UK and the USA. The book is therefore the result of the authors’ varied
experience of applied property research, property fund management, international
property investment, and academic research in these two leading markets and else-
where, including the Asian, Australian, European, and developing markets.
The subject matter can be described broadly as institutional investment in real
estate, and the foundation is an international and capital markets context viewed from
the perspective of property investment and finance professionals. The objective of this
book is to provide insights that will help global real estate investors of all types make
more informed decisions.
Investors in real estate can take many different forms. At one end of the investor
spectrum are individual investors hoping to increase their wealth by buying and hold-
ing investment property. By holding direct investments in buildings, they hope to earn
income from rents and from selling the asset at the end of a holding period for more
than they paid for it.
At the other end of the spectrum are institutional investors like sovereign wealth
funds, life insurance companies, and pension funds that may hold large portfolios of
individual properties, or shares in partnerships or funds, or publicly traded securities
secured on real estate. They do this to add diversification to portfolios that are often
dominated by securities.
xxv
xxviPreface
At either end of the spectrum, or anywhere in between, investors should be aware

of four different aspects of real estate investment, which represent the four parts of
this book.
PART I: REAL ESTATE AS AN INVESTMENT: AN INTRODUCTION
First, there is a context and a history for real estate investing around the globe. How
does real estate compare to other asset classes, and how has it performed over time?
What basic economics and finance theories help us to understand this context?
Real estate, usually seen as an excellent but illiquid diversifier (see Chapter 1), has
been a part of investor portfolios for most of the 20th and 21st centuries. Since the
1970s, real estate has become more accessible for a broader cross-section of the investing
universe. Through vehicles such as Real Estate Investment Trusts (REITs), individual
investors have greater access to real estate investments. In addition, the development
of real estate partnerships and other ownership forms has also led to more availability
for investors. Further, regulations have created an incentive for institutional investors
to expand the amount of money that they invest in real estate and pension funds, life
insurance companies, and high-net-worth individuals have all increased their alloca-
tions to real estate. Since the 1970s, these investors have both made and lost a great deal
of wealth, depending upon when they placed their money into the real estate asset class
and where that money was invested. Understanding their motivation for investing in
real estate is critical to developing an investor mindset.
An important aspect of real estate markets, and investment in them, is cyclical-
ity (see Chapter 2). In the USA since the 1970s, three complete cycles have run their
course. Similar cycles have been demonstrated around the world in the UK, Europe,
and Asia Pacific. Generally, prices of real estate assets reach high levels due to strong
interest by investors; prices paid as the cycle takes an upswing are unrelated to the
underlying supply and demand for space in the local market where tenants lease space;
and when the underlying demand and supply fundamentals deteriorate in the local
market, prices must adjust downward.
The US real estate market has experienced three distinct cycles since the 1960s,
and each was caused by similar occurrences. Some subset of investors or lenders mis-
calculated the risk of owning real estate, and bought property for prices that in ret-
rospect were too high. Once the market corrected to more accurately reflect the risk,
prices fell dramatically and large amounts of individual and institutional wealth were
destroyed. This happened in the USA in the 1970s, again in the 1980s and early 1990s,
and most recently in the latter part of the first decade of the 21st century. Similar cycli-
cality was experienced at different times and for slightly different reasons around the
world. To deal with the inevitable cyclicality in future real estate markets, we need to
understand the economics of rent (Chapter 3) and the finance-based theories of asset
pricing (Chapter 4). We have to be able to answer this question: What is a fair price for
real estate?
Preface xxvii
PART II: MAKING INVESTMENT DECISIONS AT THE PROPERTY LEVEL
Few, if any, of the investors that bought property as a wealth-enhancing asset during
the upside of the last cycle anticipated that the property would lose value and that they
would suffer a loss in wealth due to the investment. It is more likely that they expected
to earn income and to have the value of the property appreciate during their holding
period. However, due to a misunderstanding of the characteristics of real estate invest-
ment, these investors were sorely disappointed in their experience.
There are numerous techniques used to evaluate real estate investments, ranging
from simple back-of-the-envelope heuristics to complex and dynamic valuation mod-
els using discounted cash flow analysis and real options. One thing that has clearly
changed in the real estate industry is the level of sophistication among real estate inves-
tors and the amount of time and analytical power they devote to analyzing potential
real estate investments. This has partly occurred due to the increasing professionaliza-
tion of the industry, and also to the large amounts of money that are being invested in
the real estate asset class.
Like any investment, determining investment value and how much to pay for a real
estate asset requires making some judgment regarding the future cash flows expected
to be earned by the property. Generally, income from a real estate asset comes in the
form of income produced by renting the property to tenants and from value apprecia-
tion during the period which the asset is held. Since these cash flows must be forecast
into the future, and the future is impossible to predict, the difference between realized
cash flows earned and expected cash flows can be substantial.
Risk can be defined as uncertainty of future outcomes. For those investments that
exhibit greater uncertainty, the risk will be greater as well. Generally, investors in real
estate have valued assets too highly because they do not fully appreciate the risk, or
uncertainty, that an investment exhibits. This mis-estimation allows them to pay prices
that are too high relative to the property’s fair value.
The ability to model cash flows using discounted cash flow analysis is essential to
understanding how to value assets (see Chapter 5). Developing expertise in generating
expectations of cash flows, and adjusting valuations for the risk involved in the invest-
ment, helps to ensure that an investor does not overpay for a real estate investment. We
also need to understand the impact of leases (Chapter 6) and be able to build an income
statement (Chapter 7). We have to understand the common forms of debt finance, espe-
cially mortgages (Chapter 8), and model the impact of leverage and taxes (Chapter 9).
In a new chapter for this second edition, we have added a case-based discussion of real
estate development viability (Chapter 10).
However, while we believe that spreadsheets are wonderful (and that they should
be pushed hard to explore the various option pricing and simulation techniques we
do not have space to deal with properly in this book), many investors have made the
mistake of letting their spreadsheet analysis make their investment decisions for them.
It is important to recognize that techniques for valuation are merely tools to be used in
making decisions, and are only a small part of the overall assessment process.
xxviiiPreface
PART III: REAL ESTATE INVESTMENT STRUCTURES
The nature of real estate as an asset class brings with it two key problems. It is expen-
sive to buy, leading to “lumpy” portfolios, low levels of diversification, and high levels
of asset-specific risk; and it is illiquid. Various investment structures have been devel-
oped to cope with these issues, with such success that these structures now dominate
the global investment strategies of most new entrants to the market.
Diversification and specific risk reduction have been the motivation for developing
a private equity, or unlisted, real estate fund (Chapter 11). It is essential that we under-
stand how carried interest structures work in joint ventures, simple co-investment
funds, and private equity real estate funds (Chapter 12), and to consider how this may
influence incentives and decision-making.
The same driver, plus an attempt to add liquidity, is a feature of REITs and other
public equity real estate formats (Chapter 13), and liquid exposure to what should
be low-risk, property-based debt income is the goal of the structured finance market
described in Chapter 14.
PART IV: CREATING A GLOBAL REAL ESTATE STRATEGY
The institutional investment community has come to play a far greater role in the real
estate investment universe in recent years. Pension funds and life insurance compa-
nies, as well as sovereign wealth funds and investor groups in the form of public REITs
and private equity funds, have invested large amounts of wealth into the real estate
asset class. Instead of purchasing one property, these investors hold portfolios of many
properties, often across different property types and across different geographic mar-
kets. Real estate portfolio management requires an understanding of how the invest-
ment performance of different properties will interact when they are combined in a
portfolio. One of the basic tenets of modern portfolio theory is that combining assets
that perform differently over the investment horizon can lower the volatility of the
portfolio relative to the volatility of the individual assets. Therefore, there is value to
finding and investing in assets and sectors that are expected to perform differently in
the future (Chapter 15).
One might expect this to imply the necessity of a global strategy. However, using
the structures described in Part III, as global investors inevitably have and will, pro-
duces distortions that complicate the global portfolio strategy as well as the pricing
approach we developed in Parts I and II. For the larger investors, these different mar-
kets are located around the world. This creates a series of very challenging problems,
examined in Chapter 16.
Finally, as investors or as managers we need to understand when and where an
investment strategy has been successful. Have the returns been adequate, and what
drove them? This is the subject of Chapter 17, after which we draw some final conclu-
sions – and look ahead to the future – in Chapter 18.
Real Estate
Investment
PART
One
Real Estate as an Investment:
An Introduction
Real Estate Investment: Strategies, Structures, Decisions, Second Edition. Andrew Baum and David Hartzell.
© 2021 Andrew Baum and David Hartzell. Published 2021 by John Wiley & Sons, Ltd.
CHAPTER 1
Real Estate – The Global Asset
1.1 THE GLOBAL PROPERTY INVESTMENT UNIVERSE
Real estate is usually identified as a discrete, or separate, component of an investment

portfolio. It may be part of an allocation to ‘alternatives’ (financial assets that do not fall
into one of the conventional investment categories of stocks, bonds, and cash); it may
be part of an allocation to ‘real assets’ (physical assets that have an intrinsic worth and
which are expected to be a hedge against inflation); or it may be part of an allocation to
private markets (assets such as private equity or private debt which are not listed on a
public exchange). Whichever is the case, real estate (including owner-occupied hous-
ing and farmland) constitutes a very large proportion of the world’s wealth and (exclud-
ing these asset types) a significant slice of its institutional savings base.
What proportion of an investment portfolio should be in real estate? What propor-
tion of the real estate portfolio should be invested in the USA, or Russia, or continen-
tal Europe?
A new investor building a global portfolio might reasonably want to know the com-
position by value of the ‘market portfolio’ – the total value of all investable assets, like
stocks and bonds, added together. Given this, it is possible to imagine how your portfolio
might be constituted, even if you had no views about the future performance of those
assets. Assuming there were no ‘friction costs’, meaning the time and cost involved in
accessing certain markets, which makes some less attractive than others, constructing
a market portfolio would make some sense, especially given that it appears that we are
less good at forecasting market returns than we think we are.
We can estimate the size of the public equity markets at any time by adding together
the market capitalisation of the various global stock markets. We can do the same with
publicly listed bonds. Private equity is more of a challenge, however, and real estate
also creates significant difficulties. Many of the real estate assets in the world are never
valued. There is a lack of transparency in many markets, and the generally low levels of
information available in Asia and the emerging markets of the world mean that we do
not know much about the size of the investable property markets in China, India, and
Pakistan, despite their huge populations and increasingly significant gross domestic
product (GDP). Even the total value of all US housing is subject to debate.
Real Estate Investment: Strategies, Structures, Decisions, Second Edition. Andrew Baum and David Hartzell.
© 2021 Andrew Baum and David Hartzell. Published 2021 by John Wiley & Sons, Ltd.
4 REAL ESTATE AS AN INVESTMENT: AN INTRODUCTION
Nevertheless, we do have something to go on. While it has been estimated that real
estate might comprise as much as 50% of the total value of the world’s assets, this may
not represent the value of the investable stock (after all, we have no intention of selling
our homes in North Carolina and Oxfordshire to a sovereign wealth fund). We have no
easy way of estimating the investable stock either, but we can have a stab at estimat-
ing the invested stock and adjusting that value upwards. This is the approach typically
taken by analysts.
The value of the investable stock of commercial property owned by institutional
investors around the world was estimated (by CBRE, 2017) to be around $27.5 trillion
and by Property Funds Research (PFR) and others in 2019 at around £35 trillion. This is
defined as stock that is of sufficient quality to become the focus of institutional invest-
ment. This estimate must be taken as the broadest possible guide. This value can be
compared with a global equity market capitalisation of close to $69 trillion in January
2019 (World Federation of Exchanges). Assuming a typical equity exposure of say 50%,
this suggests a market portfolio weight for real estate of around 20–25%. Institutional
exposure (averaging around 10% globally – see Figure 1.4 later) remains below the mar-
ket portfolio weight, suggesting that something appears to limit institutional investors’
commitment to this asset class.
It appears that 10% is a robust estimate of current allocations to real estate. The
2018 Hodes Weill Allocations Monitor (Hodes Weill/Cornell, 2018) included research
collected on a blind basis from 208 institutional investors in 29 countries. The 2018
participants held total assets under management exceeding $11.0 trillion and had
portfolio investments in real estate totalling approximately $1.0 trillion or 9% of total
assets. Average target allocations to real estate increased to 10.4% in 2018, up 30 basis
points (bps) from 2017 and up approximately 150 bps since 2013. Despite an increase
in actual allocations, institutions remained meaningfully under-invested relative to
target allocations. While 92% of institutions reported that they are actively investing
in real estate, institutions remained approximately 90 bps under-invested relative to
target allocations.
The $35 trillion investable stock of property can be broken down to the regional
level (see Table 1.1). According to similar sources, the global market is split by asset
value into 28% North America and Europe, 32% Asia, and the remaining 11% in the
other regions.
The USA and Japan are the two largest single-country markets in the world. The
UK is the third largest global market.
TABLE 1.1 The global property investment universe ($ billion)

Latin Africa/ North
Asia Australasia Europe America Middle East America Total
$11,490m $730 $10,044 $1,627 $1,537 $9,992 $35,420
Sources: PFR, PGIM, IMF, and EPRA 2019.

The US institutional real estate investment market is measured by the National

Council of Real Estate Investment Fiduciaries (NCREIF), whose NCREIF Property
Index (NPI) consists of 8,289 investment-grade, income-producing properties with a
total market value of $653 billion at the second quarter of 2019. The breakdown of the
portfolio is 35% office, 25% apartments, 22% retail, 17% industrial, and 1% hotels.
In 2018 The Investment Property Forum estimated the total value of all commer-
cial property in the UK to exceed £935 billion (a figure which includes the institutional
investment universe of £509 billion). Within this £935 billion, it is estimated that 34% is
retail property, 42% office property, and 14% industrial property. The remaining 10% cov-
ers a wide range of property including residential, hotels, pubs, leisure, utilities, and pub-
lic service buildings. The universe used to compile the MSCI (formerly IPD) UK annual
index at the end of 2018 comprised over 13,130 properties worth around £220 billion.
A truly global real estate benchmark is approaching, but for now we are limited
to around 25 countries for which good data is available. For example, the MSCI Global
Property Index measures the combined performance of real estate markets in 23 coun-
tries. The index is based on the MSCI (formerly IPD) indices for Australia, Austria, Bel-
gium, Canada, Denmark, France, Germany, Ireland, Italy, Japan, Korea, Netherlands,
New Zealand, Norway, Poland, Portugal, South Africa, Spain, Sweden, Switzerland,
UK, USA, and the KTI Index for Finland.
As we shall see in Part II of this book, ownership of this global universe is financed
through equity (some private and some public, such as that raised by public property
companies) and debt (some private, such as mortgages, and some public, such as com-
mercial mortgage-backed securities). This classification is known in the USA as the
‘capital stack’, and breaks down roughly as shown in Table 1.2.
The make-up of the private equity pot has recently changed as direct property own-
ership has been converted into fund formats, and public equity has grown as the Real
Estate Investment Trust (REIT) format has been applied to more and more countries
outside its US home.
PFR estimated in 2019 that 79% of the global property universe is held directly,
while 13% is held in listed form and 8% is owned by private funds. Surveys suggest
that there is potential for much further growth in funds. In the long run, it is reason-
able to suppose that more listed and unlisted property funds will follow to convert the
huge pool of government and owner-occupier-held property into an investable form.
It is expected that growth in the creation of funds will continue. Prior to the crash
of 2007–9, investors were taking more risk in search of maintaining attractive return
levels, resulting in an increased appetite for what are called ‘value-add’ (higher-risk)
TABLE 1.2 The global capital stack

Private equity Public equity Private debt Public debt
38% 8% 44% 10%
Source: DTZ (2015).

funds and growing interest in emerging markets on the fringes of Europe, the Middle
East and North Africa, Sub-Saharan Africa, South America, and Russia. That endeav-
our may well recommence.
1.2 MARKET PLAYERS
The property investment market is driven by investors and fund managers, guided by
advisory firms.
1.2.1 Investors
The largest global real estate investors are pension funds, insurance companies, and
sovereign wealth funds (also known as government funds). Tables 1.3 and 1.4 show the
world’s largest sovereign wealth funds and pension funds, and what we know about
their property assets. (Many insurance funds are very large but more opaque.)
TABLE 1.3 The largest sovereign wealth funds and their property assets
Estimated
Estimated Invests in value of real
Domicile Name value of fund real estate? estate
Norway Norway Government $1,053bn Yes $30bn

Pension Fund
Global
China China Investment $941bn No
Corporation
Abu Dhabi Abu Dhabi Investment $696bn Yes $52bn
Authority
Kuwait Kuwait Investment $592bn Yes $15bn
Authority
Hong Kong Hong Kong Monetary $509bn No
Authority Exchange
Fund
Saudi Arabia Saudi Arabian $506bn No
Monetary Authority
China China State Adminis- $441bn No
tration of Foreign
Exchange (SAFE)
Singapore GIC Private Limited $440bn Yes $31bn
China National Council for $438bn No
Social Security Fund
Saudi Arabia Saudi Arabia Public $320bn Yes
Investment Fund
Estimated
Estimated Invests in value of real
Domicile Name value of fund real estate? estate
Qatar Qatar Investment $320bn Yes $35bn
Authority
UAE Investment $240bn Yes $38bn
Corporation
of Dubai
Singapore Temasek Holdings $238bn Yes $40bn
UAE Mubadala Investment $229bn Yes
Company
Korea Korea Investment $122bn Yes $18bn
Corporation
Source: PFR.
Insurance companies remain important, as do high net worth individuals operat-

ing through private banks and family offices. This immediately introduces us to the
concept of the intermediary or capital aggregator, which is important in real estate
because of the large size of the assets involved. Insurance companies, pension funds,
private banks, and wealth managers are aggregators of retail (individuals’) capital, and
are seen as investors, largely because they have discretion or control over investment
decisions. Meanwhile, aggregators of institutional capital, such as fund managers act-
ing for pension funds, are seen not as investors but as a particular breed of advisor.
TABLE 1.4 The largest pension funds and their property assets
Estimated
Total value Invests in value of real
Domicile Name of fund real estate? estate
Japan Japanese Government $1,552bn Yes $77bn

Pension Investment
Fund
Korea Korean National $574bn Yes $28bn
Pension Scheme
USA Thrift Savings Fund $558bn Yes
Netherlands ABP Stichting $447bn Yes $51bn
Pensioenfonds
USA California Public $439bn Yes $34bn
Employees
Retirement System
(continued)
TABLE 1.4 (Continued)

Estimated
Total value Invests in value of real
Domicile Name of fund real estate? estate
Canada Canada Pension $296bn Yes $37bn
Plan Investment
Board
Singapore Singapore Central $284bn Yes
Provident Fund
Netherlands Pensioenfonds Zorg en $252bn Yes $13bn
Welzijn
USA California State $227bn Yes $29bn
Teachers Retirement
System
USA New York State $221bn Yes $19bn
Common Retire-
ment Fund
USA New York City Board $211bn Yes $14bn
of Education Retire-
ment System
USA Malaysian Employees $204bn Yes $6bn
Provident Fund
USA Florida State Board of $201bn Yes $22bn
Administration
USA Florida Retirement $160bn Yes $18bn
System
Source: PFR.
It can be difficult to distinguish between a sovereign wealth fund, such as the

Abu Dhabi Investment Authority, and a national pension fund, such as the Japa-
nese Government Pension Investment Fund, but pension funds generally have well-
defined and immediate liabilities, specifically to pay our pensions, while sovereign
wealth funds may have no defined liabilities other than a broad objective to protect
the nation’s wealth. This is an important distinction in real estate investing, because
(as we will see later in this chapter) real estate is regarded as an illiquid, long-
term asset class, more suited to the investor without short-term liabilities. Hence it
appears to be especially attractive to sovereign wealth funds (see Box 1.1 at the end
of this chapter).
Sitting somewhere between the investor and fund manager categories are
other aggregators, including real estate fund of funds managers and other advisory
firms. Whether through discretionary or advisory (non-discretionary) mandates,
these groups act on behalf of smaller investors to access global real estate assets
and funds.
1.2.2 Fund Managers

Property investment is illiquid and difficult to diversify. An apparently obvious solu-
tion to these problems is the use of liquid traded property vehicles in place of the direct
asset. A variety of legal structures exist which are capable of providing a means for
investment in domestic or international real estate investment, including REITs and
the new generation of unlisted property funds, both open-ended and closed-ended.
In addition, work continues on the development of synthetic vehicles (derivatives) to
provide solutions to these problems. These vehicles may have the primary objective
of reducing tax, achieving liquidity, or aligning the interests of the investors and the
managers. They exist primarily to permit co-mingling of investors, and are more fully
described in Part III of this book.
As a result of the boom in funds, there has been a shift in control of the global mar-
ket away from the insurance companies and pension funds which were so dominant in
1980 towards fund managers and property companies (the distinctions between which
are occasionally blurred). Through the 1980s, the institutional investor dominated the
industry, controlling the larger transaction business and driving best practice. In the
1990s, the effects of privatisation and outsourcing reached down to the institutions.
There has consequently been a restructuring of their investment and property divi-
sions, with the result that the power base now lies within specialist fund management
operations, which may themselves be owned by what used to be insurance companies
and are now financial services groups.
Table 1.5 shows the top 15 global property fund managers and the value of the
assets held by those managers in Europe, the Americas, Asia, and Australasia. Sig-
nificantly, there are as yet no large Asia-based managers, but Mitsubishi (Japan) and
Capitaland (Singapore) would probably be on the cusp of the top 10 if they took part
fully in the PFR survey.
1.2.3 Advisors
Developments in the investor and fund manager communities have created a more
complex industry structure and a confusion of ownership and management. The tra-
ditional property service providers have been severely challenged by these changes.
Even so, many of these businesses have been successful in creating their own fund
management operations (such as LaSalle Investment Management, Savills Investment
Management, and CBRE Global Investors).
Other advisors or service providers have become essential to the working of the com-
mercial real estate investment market. These include placement agents and promoters
of property funds; lawyers; tax advisors; trustees and custodians; investment brokers
and agents; valuers (or appraisers in the USA); and property and asset managers, who
are most easily found within the traditional service providers, but have competition in
the form of specialist facilities management businesses. Recently, the emergence of
WeWork and the general growth of co-working has redefined the nature of facilities
management and driven hospitality and property management sectors closer together,
so that property and asset management is in a state of flux.
1.3 PROPERTY – ITS CHARACTER AS AN ASSET CLASS
Institutional investors appear to hold less property than would be indicated by its neu-
tral market weighting. This under-weighting can be attributed to several factors. These
include the following:
1. The operational difficulties of holding property, including illiquidity, lumpiness

(specific risk), and the difficulties involved in aligning the property and securities
investment management processes.
2. The introduction of new alternative asset classes, some offering the income secu-
rity and diversification benefits associated with real estate, including index-linked
gilts, private equity, infrastructure, and private credit.
3. A lack of trust in property data, due to the nature of valuations, suspicions of
smoothing in valuation-based indices, and the lack of long runs of high-frequency
return histories.
The result, as we have seen, is a mismatch between the importance of the asset class
in value and its weighting in institutional portfolios. Between 1980 and 2000, insurance
companies reduced their property holdings from allocations as high as 10% (USA) and
20% (UK) to much lower levels. The case for property may have been overstated in the
past, but suspicion regarding the asset class has reduced its appeal to institutions.
This is despite the fact that property investment has become better managed
and more professionally packaged, and many of the problems associated with prop-
erty investment appear to have found workable (if imperfect) solutions. By 2000, the
measurement, benchmarking, forecasting, and quantitative management techniques
applied to property investments had become more comparable with other asset classes.
Advances in property research had provided ongoing debates with a foundation of
solid evidence, and produced a clear formulation of many relevant issues. The result
was an early 2000s boom in commercial and residential real estate investment across
the globe, accompanied by such excellent returns that by 2005 property had become a
high-performance asset class. However, the crash of 2007–9 pointed to cracks in the
foundations.
By 2007, inevitably, clear overpricing had become evident in housing and in com-
mercial property of all types in the UK, USA, and elsewhere. The ability of property
investors and homeowners to take on debt secured on the value of property, coupled
with the ability of lenders to securitise and sell those loans, created a wave of capital
flows into the asset class and a pricing bubble. Professional responsibility took a back
seat to the profit motive. Boardrooms lacked the detached yet experienced voices that
advances in information and research should have made available.
London and New York had become the main centres for creative property structur-
ing through REITs, unlisted funds, property derivatives, and mortgage-backed securi-
ties, and became the eye of the financial storm that followed. The technical advances
made in information and research, and the spreading of risk made possible by the
development of property investment products, did not prevent a global crisis from
being incubated in the world of property investing. Worse, the global financial crisis
of 2008 had its very roots in property speculation, facilitated by the packaging and re-
packaging of equity, debt, and risk. It is essential, as a result of this noise, to re-examine
the fundamental character of real estate as an asset class.
As with all equity-type assets, the performance of property is ultimately linked to
some extent to the performance of the economy (see Chapter 3), and like all assets its
performance is linked to the capital markets (see Chapter 4). The economy is the basic
driver of occupier demand, and in the long term, investment returns are produced by
occupiers who pay rent. However, in the shorter term – say up to 10 years – returns are
much more likely to be explained by reference to changes in required returns, or yields.
Required returns do not exist in a property vacuum but are instead driven by available
or expected returns in other asset classes. As required returns on bonds and stocks
move, so will required returns for property, followed by property prices.
Nonetheless, history shows that property is distinctly different from equities and
bonds. The direct implication of property being different is its diversification potential,
perhaps the strongest justification for holding it within a multi-asset portfolio. Gener-
ally, the impact of the real economy and the capital markets on the cash flow and value
of real estate is distorted by several factors. It appears to be the case that these distor-
tions contribute to the return diversity that investors crave, leading to inevitable disap-
pointment when they reveal themselves.
1.3.1 Property Depreciates

▪▪ Property is a real asset, and it wears out over time, suffering from physical deteriora-
tion and obsolescence, which together create depreciation.
Commodities (say coffee, or oil) are by nature different from paper assets. Com-
modities will normally depreciate over time; they can have a value in use that sets a
floor to minimum value; and they are generally illiquid. Finally, they may have to be
valued by experts rather than priced in a secondary market. Examples include property
of all types (that is, both real and personal).
Real property is, unlike equities and gilts (Treasuries in the USA), a physical
asset. While, unlike personal property, it is durable (and immovable), the physical
nature of buildings means that they are subject to deterioration and obsolescence,
and need regular management and maintenance. Physical deterioration and func-
tional and aesthetic obsolescence go together to create depreciation, defined as a fall
in value of a piece of real property or real estate relative to an index of values of new
buildings.
The problem of building depreciation or obsolescence of freehold buildings is often
understated. All things equal, buildings located in areas of low land value will suffer
more deterioration in performance over time than will buildings located in areas of
high land value, so that poor-quality suburban offices located in out-of-town business
parks with no local transport infrastructure will out-depreciate prime retail property,
even in the face of attack from on-line retailing.
A failure to identify the potential impact of depreciation is very dangerous. Before
the boom of 2004–7, the UK office sector failed to outperform the UK IPD universe in
every year except two since 1981: depreciation was probably one of the major causes.
1.3.2 Lease Contracts Control Cash Flows

▪▪ The cash flow delivered by a property asset is controlled or distorted by the lease con-
tract agreed between owner and occupier.
Unlike equities, property’s income stream is governed by lease contracts, and,

unlike bonds, the income from a freehold is both perpetual and may be expected to
increase at lease events (rent reviews and lease ends in the UK; lease rollovers in the
USA). Property’s cash flow and investment characteristics flow partly from the effects
of the customary occupational lease.
In a typical US lease of 3–5 years, rents will often be indexed to the consumer
price index or escalated according to a fixed schedule. In continental Europe, leases
of between 3 and 10 years will usually be indexed, although the degree of inflation
captured by the lease rent will not always be 100%. In the UK, the initial rental income
is usually fixed for the first 3–5 years, with uplifts to market rents at each rent review,
sometimes upwards only. This creates a low-risk option or convertible asset. In many
markets, turnover or percentage rents are adjusted to top up a base fixed amount with
a percentage of the occupier’s turnover, another form of option.
In Asia, commercial leases tend to be shorter, between 2 and 3 years, given the
greater volatility of the emerging markets in the region. As leases are shorter, they are
also not normally linked to any rental index. In Australia, larger-area office leases tend
to be for 10 years with the tenant having the right of a 10-year extension, with annual
rent increases. For smaller areas, the lease structure would more typically be for 3 plus
3 or 5 plus 5 years. Rent increases would normally be annual, based on CPI or fixed
percentage rises, with market reviews at the beginning of the lease extension.
We deal more fully with leasing in Chapter 6. It can be seen that the precise nature
of real estate as an asset in any location will vary by leasing practice and the jurisdiction
which interprets those leases.
1.3.3 The Supply Side is Inelastic

▪▪ The supply side is controlled by zoning or planning regulations, and is highly price
inelastic. This means that a boom in the demand for space may be followed by a sup-
ply response, but only if permission to build can be obtained and only after a signifi-
cant lag, which will be governed by the time taken to obtain a permit, prepare a site,
and construct or refit a property.
The supply side of property is regulated by local and central government. The con-
trol of supply complicates the way in which an economic event (such as a positive or
negative demand shock) is translated into return. A loosening of planning policy, such
as happened in many locations in the mid-1980s, created the conditions for an immedi-
ate building boom, which, in the case of the USA, was accompanied by tax breaks, fur-
ther distorting supply. Nonetheless, it is difficult to vary the supply of property upwards,
and even more difficult to vary it downwards. This is termed supply inelasticity.
The supply side can be both regulated and inelastic, and will sometimes produce
different return characteristics for property from equities – which is otherwise the
natural property analogy – in the same economic environment. More elastic supply
regimes, such as those pertaining in loose planning environments in parts of Texas, or
for industrial property in regeneration cities, will produce different cash flow charac-
teristics for property investments than will highly constrained environments, such as
central Paris or the West End of London. The typical industrial investment will typi-
cally deliver less-volatile rents, and will show less rental growth in times of demand
expansion, than will the less elastic Paris or West End office.
1.3.4 Valuations Influence Performance

▪▪ The returns delivered by property are likely to be heavily influenced by appraisals
rather than by marginal trading prices.
In the absence of continuously traded, deep, and securitised markets, commercial

property valuations perform a vital function in the property market by acting as a sur-
rogate for transaction prices. Property asset valuations are central to the process of per-
formance measurement, but within both the professional and academic communities
there is considerable scepticism about the ability of appraisals or valuations to fulfil this
role in a reliable manner.
There is a consensus that individual valuations are prone to a degree of uncer-
tainty. At the macro-level, it is clear that few analysts accept that appraisal-based indi-
ces reflect the true underlying performance of the property market. It is commonly
held, for example, that such indices fail to capture the extent of market volatility and
tend to lag underlying performance. As a consequence, issues such as the level and
nature of valuation uncertainty and the causes and extent of index smoothing have
generated a substantial research literature.
Some of this research indicates that valuations both lag the market and smooth the
peaks and troughs of ‘real’ prices. Valuations – and, if valuations affect market psychol-
ogy and hence prices, real estate prices – can be ‘sticky’.
In many jurisdictions, the fiduciary responsibility of the valuer (appraiser) towards
the client is an important influence on valuer behaviour. Claims based on accusations
of professional negligence are rare but not unknown, and judicial precedent is a pow-
erful influence on the valuation process, as is ‘anchoring’. (Anchoring is a general psy-
chological tendency by which individuals are influenced by an initial value and adjust
that value to account for changes. Once the anchor – like the price you paid for your
house – is set, there is a strong and continuing bias toward that value, for example in
your subsequent asking price.)
It is not therefore surprising if a valuer, retained to produce a portfolio valuation on
a 3-year contract, pays attention to his/her year-end 2010 valuation when undertaking
the 2011 equivalent and ensures continuity by limiting the number and size of shocks
a client might suffer. This can reduce changes in valuation from one period to the next.
In addition, real estate valuation is founded primarily on the use of comparable
sales evidence. Similarity in property characteristics is paramount. The currency of the
transaction may not be easy to control. Hence, the evidence used to value a property
as at 31 December 2020 may use evidence collected over the period July to Decem-
ber. In a rising or falling market, this will again result in a lower variance of prices.
Hence, valuations will be based on the previous valuation plus or minus a perception
of change. The perceived changes, unless based on very reliable transaction evidence,
will be conservative.
The resulting issue of valuation ‘smoothing’ has been widely analysed. It is gen-
erally presumed to reduce the reported volatility – or risk – of real estate investment
below the real level of risk suffered by investors who have to sell in a weak market or
buy in a strong one.
1.3.5 Property is Not Liquid

▪▪ Property is highly illiquid. It is expensive to trade property, there is a large risk of abor-
tive expenditure, and the result can be a very wide bid–offer spread (a gap between
what buyers will offer and sellers will accept).
It costs much more to trade property than it costs to trade securities. There are
both direct and indirect costs. Table 1.6 shows that the direct costs include taxes paid
by buyers on property transactions (real property transfer taxes in the USA vary from
state to state, but stamp duty in the UK is as much as 5% of the purchase price for larger
commercial transactions) and fees paid by both buyers and sellers. In addition to taxes,
buyers will incur survey fees, valuation fees, and legal fees, totalling (say) 1.75%. The
buyers’ costs, including tax, can therefore be 6.75% in the UK. Sellers will incur legal
fees (say 0.5%) and brokers’ fees (say 1%), so that 1.5% can be the total sellers’ cost, and
a round-trip purchase and sale can cost 8.25%.
These costs, which can be even higher in other jurisdictions, define one cause of
the ‘bid–offer spread’ which inhibits liquidity. It is natural for a seller to wish to recover
his total costs, so that having bought a property for £1 million he will wish to get back
£1.0825 million in order not to have lost money. But in a flat or falling market buyers
will not pay this price, and sellers are tempted to hang on until the selling market is
stronger. Hence, liquidity will be positively related to capital growth in the market.
There are also indirect costs of transacting property. Every property is unique,
which means that time and effort have to be expended on researching its physical quali-
ties, its legal title, and its supportable market value. In addition, the process by which
TABLE 1.6 Real estate transfer costs, Europe (purchaser, % of purchase price)
Due diligence Property
Country costs Agent’s fee transfer tax Total cost
France 0.6% 1% 6.7–7.3% 8.6%

Germany 0.75% 1% 3.5–6.5% 6.8%
Netherlands 0.5% 1% 6% 7.5%
Poland 0.5% 1–3% 2% 4.5%
Spain 0.5% 1–3% 6% 8.5%
UK 0.8% 1% 5% 6.8%
Source: CBRE Global Investors.

properties are marketed and sold can be very risky to both sides. In many markets,
including the USA and England and Wales, there is a large risk of abortive expendi-
ture, because buyers and sellers are not committed until contracts are exchanged, and
last-minute overbids by another buyer, or a price reduction (or ‘chip’) by the buyer, are
common. The role played by professional property advisers, and the integrity of all par-
ties who may wish to do repeat business with each other, create a sensitive balance and
risk control in the transaction process. This transaction risk must also be built into a
bid–offer spread (the gap between what buyers will offer and sellers will accept).
It seems obvious that an increasingly digitalised world will one day deliver instant,
costless real estate transactions. Businesses will innovate ways of extracting and trans-
ferring digital data across platforms, and creating products which will encourage
transaction efficiency (e.g. insurance-backed property passports). Industry groups will
develop standards and protocols encouraging common standards for digital data and
record-keeping, including the intelligent application of distributed ledger technology.
However, human beings will protect themselves in a caveat emptor world by taking
their time and being thorough in the research process before committing large capital
sums. Until we arrive at the instantaneous transaction, buyers and sellers will wish to
pay professional advisors for risk mitigation and, on occasion, risk transfer (Baum and
Saull, 2019).
Finally, the lack of a formal market-clearing mechanism for property, such as is
offered by the stock market for securities, means that on occasion there may be few or
no transactions, reducing the flow of comparable sales information and further increas-
ing the perceived risk of a transaction, creating a feedback loop and self-sustaining
illiquidity. This appeared to be the case, for example, in most global markets in 2007–9.
1.3.6 Large Lot Sizes Produce Specific Risk

▪▪ Property assets are generally large in terms of capital price. This means that property
portfolios cannot easily be diversified, and suffer hugely from specific risk.
Property is heterogeneous, meaning that an investment can do well when markets

do badly, and vice versa. Property is also ‘lumpy’. Lumpiness – the large and uneven
sizes of individual assets – means that direct property investment (buying buildings)
requires considerably higher levels of capital investment when compared with securi-
ties, and even with significant capital investment, diversification within property port-
folios may prove to be more challenging than in equity and bond portfolios. As a result,
typical property portfolios contain high levels of specific risk.
This fact, coupled with the growing globalisation of property portfolios, largely
explains the boom in indirect vehicles such as REITs and unlisted funds since 1990.
There is also some evidence that large lot sizes have been high-beta investments (more
responsive to the economy and to rises and falls in the investment market). This adds
a further risk level.
Specific risk in property, whether measured as a standard deviation or as a track-
ing error against a benchmark (see Chapters 4 and 17), is a key problem, especially for
international investors. Unlike securities, large average property capital values, an une-
ven distribution of these values, and the unique or heterogeneous nature of property
assets creates very different real estate portfolios across investors. Property funds offer
a way to limit this problem, as all three issues are minimised by investing indirectly
by using diversified funds. But specific risk varies significantly between sectors, and
unlisted funds (which add other risks) may be more useful in some sectors and coun-
tries than others. This is not simply a function of lot size, but also of ‘diversification
power’ within sectors, defined as the efficiency of specific risk reduction through add-
ing properties (Baum and Struempell, 2006; Baum, 2007).
Investors who have targeted low-risk or ‘core’ property as an asset class will most
likely be seeking to replicate the benchmark performance with few surprises; after all,
the decision to invest in property is often based on an analysis of historic risk and
return characteristics produced from a market index or benchmark. The tracking error
of a portfolio is therefore likely to be seen as an additional and unrewarded risk. As a
result, managers may be charged with minimising tracking error – but with limited
sums to invest. This is a very difficult challenge: how many properties are needed to
reduce tracking error to an acceptable level?
Various studies, all of which concentrate on portfolios of properties of mixed
types and geographies, have suggested that the appropriate number of properties is
very large. Relevant sources include the seminal work of Markowitz (1952), Evans
and Archer (1968), and Elton and Gruber (1977). A limited number of studies inves-
tigate risk reduction and portfolio size in the property market. They include Brown
(1988), Brown and Matysiak (2000), Morrell (1993), and Schuck and Brown (1997). It
is concluded that many assets are needed to reduce risk to the systematic level when
value-weighting returns, depending on the degree of skewness of property values in
the portfolio.
It is also well known that the necessary level of capital required to replicate the
market will be greatly dependent on the segments of property in which one wishes to
invest, as different segments of the property market exhibit vastly different lot sizes. For
example, it appears obvious that a very large allocation of cash may be needed to invest
in a sufficient number of shopping centres to replicate the performance of that segment
with a low tracking error.
In addition, there are significant differences in the performance characteristics of
properties within the different segments. Properties in some segments – for example,
London offices – may experience higher variations in return than others, resulting in
the probability that more properties will be needed to minimise tracking error within
the segment. If London offices are also relatively expensive, the problem of assembling
a market-tracking portfolio at reasonable cost is magnified.
This issue, amongst others, explains a consistent push towards the unitisation,
fractionalisation, or democratisation of individual real estate assets. This push has con-
sistently proved unsuccessful, either because market conditions have not been right,
limiting either or both of the demand and supply sides, or because regulatory and tax
issues have not been dealt with. In 2019, IPSX, a regulated exchange, was set up in
London to trade shares in single-asset property companies. At the same time there has
been a lot of noise made about the digital tokenisation of assets. Given the thoughtful
approach taken by IPSX to regulation and tax transparency, this has the best chance of
some success, but history has taught us to be sceptical about the likely scale of such a
unitised market.
1.3.7 Leverage is Commonly Used in Real Estate Investment

▪▪ Leverage is used in the vast majority of property transactions. This distorts the return
and risk of a property investment.
‘Gearing’ and ‘leverage’ are terms used to describe the level of a company’s debt.
This is typically compared with its total debt or its equity, usually expressed as a ratio
or percentage. So, a company with gearing (debt to equity) of 60% has levels of debt
that are 60% of its equity capital. Alternatively, gearing might be expressed as the level
of a company’s debt compared with its gross assets (debt plus equity). In that case, the
above example would produce a gearing (debt to gross assets, or loan to value) ratio of
30%. Throughout this text we use gearing and leverage interchangeably to mean the
relationship of debt to gross assets.
This concept (or these concepts) translate directly into the world of commercial
real estate investment. In the right market conditions, banks have been willing to lend
more against the security of property than against other assets such as equities. This is
a result of property’s income security and the land, bricks, and mortar salvage value of
a non-performing property loan.
Banks have typically been keen to lend against the collateral security offered by
real estate assets, especially when the rental income more than covers the interest pay-
ments on the loan (see Chapter 8). But the use of gearing will change the financial
mathematics of the real estate investment. It reduces the amount of equity that needs
to be invested; it reduces the net cash flow available to the investor by the amount of
interest paid; and it reduces the net capital received by the investor on sale of the asset
by the amount of the loan still outstanding. This has some complex tax and currency
effects in the international context (see Chapter 16) and allows more diversification
of specific risk at the asset level, because the investor can buy more properties for the
same total outlay of equity. It also has two more direct implications, on return and risk.
If the prospective return or IRR on the investment without using leverage is higher
than the interest rate charged, then leverage will be return-enhancing; and the greater
the leverage, the greater will be the return on equity invested. In addition, the risk
of the investment will be greater. The chance that the investor will lose his equity is
greater the higher is the level of gearing, and the sensitivity or volatility of the prospec-
tive return will be greater. This is illustrated in Table 1.7, which shows how changing
capitalisation rates (yields) on the sale of a specific property (more fully described in
Baum and Crosby, 2008) produced a wider range of returns on equity (using 70% debt)
than on the unleveraged investment.
TABLE 1.7 The impact of exit yields on the risk to equity (70% leverage)
Exit yield IRR IRR on equity
7.50% 12.00% 18.77%

8.50% 10.00% 15.10%
10.50% 6.00% 3.90%
Source: Baum and Crosby (2008).

The history of ungeared direct property returns, such as is produced by IPD in

Europe and NCREIF in the USA, disguises the returns that have been available to
investors’ equity over most subperiods of the past 25 years. Just as homeowners can, in
times of rising house prices and low interest rates, significantly enhance the return on
the cash they invest by borrowing, property companies and private commercial prop-
erty investors use debt finance to (hopefully) increase returns on equity – always at the
cost of increasing risk.
By using rents to pay interest and (if possible) some capital repayment (amortisa-
tion), investors can enjoy a return on their equity investment in excess of the reported
total return available to whole-equity investors, such as pension funds. These geared
returns are rarely reported, but explain most private capital investments in global com-
mercial property. Leverage is discussed in more detail in Chapter 9.
1.3.8 Property Appears to be an Inflation Hedge

▪▪ Property rents appear to be related to inflation in the long run, producing a reasonable
but imperfect hedge.
For many investors, particularly pension funds which have liabilities linked to future
wage levels, the need to achieve gains in money value (in nominal terms) is of less con-
cern than the need to achieve gains in the purchasing power of assets held (in real terms).
Many investors appear to believe that there is a strong correlation between rents
and inflation in the long run, and that the cash flow produced by real estate might
(although subject to deterioration and obsolescence) be expected to increase in line
with inflation over a long period. This is somewhat supported by theory, as the profit of
an operation before rent should be positively correlated with inflation and so, therefore,
should rent and profit after rent (see Chapter 3).
This belief is exemplified by the clear (73%) correlation between UK real estate and
index-linked government bond yields as shown in Figure 1.1. The prices of these two
Average UK yield 10 yr index linked gilt yield

9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
–1.0
92
94
96
98
00
02
04
06
08
10
12
14
16
19
19
19
19
20
20
20
20
20
20
20
20
20
–2.0
FIGURE 1.1 UK real estate and index-linked government bond yields, 1992–2017
Sources: MSCI, PFR.
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confusión, y quizás algo de ineptitud o mala fe en la persona
comisionada para arreglar el asunto. Llegó el mes de agosto, y los
dichosos papeles no parecían. A mediados de dicho mes, el cansancio
de Cordero no podía ser mayor; y recordando que tenía en Madrid un
amigo que era el mejor agente de negocios eclesiásticos de toda
España, escribiole una larga carta encomendándole la reclamación y
pronto despacho de aquel asunto, que era la clave de su dicha. En e
sobrescrito puso: «Señor don Felicísimo Carnicero, calle del Duque de
Alba, en Madrid».
¿Y qué? ¿Perderemos esta ocasión de trasladarnos otra vez a la
Villa y Corte sin pagar costas de viaje? No mil veces; que estas
ocasiones no se presentan todos los días. Callandito nos deslizamos
dentro de la carta, y henos aquí en poder del ordinario de Toledo, que
puntualmente la llevará a su destino, y a nosotros con ella.
Muy bien se va dentro de una carta. Además de que no hay mejo
aposento que un pedazo de papel doblado, tenemos la ventaja de
conocer los secretos que nuestras compañeras de viaje, las señoras
letras, llevan consigo. Una oblea es llave de nuestra breve cárcel, y un
dedo vacilante, rompiendo la frágil pared, nos devuelve la libertad.
Ya estamos.
Abierto el papel, salimos un poco estropeados y entumecidos a
causa de la postura violenta que es indispensable en los viajes
epistolares, y pronto nos hallamos frente a frente de una tabla que se
esforzaba en ser semblante humano. Era don Felicísimo, que en aque
momento en que le vemos, decía:
—Permítame usted que lea esta carta.
Tenía visita. Miramos, y en efecto, frente a la mesa estaba un
caballero de muy buena presencia, el cual, si no tenía cuarenta años
andaba muy cerca de ellos. Vestía bien. Su rostro era moreno, su
frente alta y hermosa, su complexión robusta, sin dejar de se
delicada, su modo de mirar triste, sus ojos negros y ardientes a la vez
como las noches de verano.
Carnicero leyó la carta, y dijo entre dientes: «bueno».
Después la puso bajo el pie de cabrón, y prosiguió lo que con aque
buen señor hablaba cuando llegamos.
—Decía que el negocio de usted es de los más delicados que he
visto. Parte de la fortuna de su tío de usted, el señor canónigo de la
Sonora, ha debido pasar al Monte Pío Beneficial de la diócesis de
Pamplona. Lo que está en la escribanía de la Puebla de Arganzón
puede ser recogido por usted si tiene valimiento y activa el asunto
¿Por qué no se presentó usted a recoger su herencia cuando tuvo
noticia del depósito? Ya me ha dicho usted que en aquellos días
estaba emigrado y perseguido por las leyes. Pero eso no es una
razón. Hoy también lo está usted, y si se le deja en paz y aun se le
permite abandonar la farsa del nombre supuesto, es porque ha traído
recomendaciones de altos personajes legitimistas... Yo..., puesto en
lugar de usted, me decidiría a perder la mitad de la herencia del seño
canónigo de la Sonora con tal de sacar libre la otra mitad, y confiaría
mi pleito a un agente hábil y astuto que supiera mover los trastos y
sacar adelante el negocio con toda prontitud.
—Ya lo he pensado —dijo el caballero—, y no tengo inconveniente
en ceder la mitad de la herencia a la persona que arregle esta cuestión
sacando del Monte Pío Beneficial de Pamplona lo que indebidamente
ha sido llevado a él. ¿Quiere usted que hagamos el convenio ahora
mismo?
Don Felicísimo pareció dudar. Su cara de fósil sufrió
transformaciones ligerísimas en color y contextura, cual si estuviera
sometida en un laboratorio a fuertes influencias químicas. Variaron sus
mejillas del gris cretáceo al rojo de cinabrio, su frente se llenó de
arrugas como un terreno que se cuartea a causa de un
recalentamiento interior, y sus ojos cambiaron un momento la
transparencia imperfecta del talco por el brillo del feldespato.
—La mitad, la mitad, y punto concluido —dijo el otro, que sin duda
era más vivo que un azogue y gustaba de las resoluciones prontas—
Hagamos el contrato hoy mismo, y fijemos seis meses para e
despacho del negocio. Si a los seis meses está resuelto, la mitad para
mí, la mitad para usted.
Don Felicísimo empezó a balbucir excusas y a presentar sus
muchos años y su retraimiento de los negocios como un obstáculo
para emprender aquel que se le proponía. Habló mucho
reconociéndose incapaz. Por los dos ángulos de su boca salía la saliva
como una erupción bituminosa, que en aquellas concreciones y
repliegues de la barba rapada se dividía en menudos arroyos. E
taimado viejo ponderaba las dificultades del pleito y su ineptitud, sin
duda porque no le parecía bastante la mitad y quería dos tercios de la
herencia.
—La mitad —manifestó resueltamente el otro—. ¿Quiere usted, sí o
no?
—Por ser usted recomendado del señor don Alejandro Aguado
marqués de las Marismas — replicó el viejo—, acepto y tomo a m
cargo su negocio.
—La mitad... seis meses.
—La mitad... seis meses —repitió Carnicero, y su vocecilla salió de
la espelunca de su boca rugiendo como el oso prehistórico—
Hagamos hoy nuestra escritura.
Tomando el pie de cabrón con su mano de corcho, dio un porrazo
sobre la mesa que hizo temblar hasta en sus cimientos el montón de
legajos.
Después rodó la conversación sobre diversos asuntos, y concluyó
en política. Acerca de ella dijo el caballero lo siguiente:
—He perdido todas las ilusiones. He vivido mucho tiempo en
España en medio de las tempestades de los partidos victoriosos, y
mucho tiempo también en el extranjero en medio del despecho de los
españoles vencidos y desterrados. La experiencia me ha hecho ve
que son igualmente estériles los gobiernos que persiguen
defendiéndose y los bandos que atacan conspirando. Yo he
conspirado también algunas veces, y en aquellos trabajos oscuros he
visto en derredor mío pocos móviles generosos y muchas, muchísimas
ambiciones locas, apetitos y rencores que no se diferenciaban de los
del despotismo más que en el nombre. La realidad me ha ido
desencantando poco a poco y llenándome de hastío, del cual nace
este mi aborrecimiento de la política, y el propósito firme de huir de ella
en lo que me quedare de vida.
—Bien, bien —dijo don Felicísimo agitándose en su asiento y
golpeando sus manos una con otra en señal de júbilo—. Es usted un
enemigo más de esas endiabladas teorías constitucionales y de esas
invenciones satánicas llamadas partidos, y del estira y afloja de Cortes
que gobiernan y rey que reina, y hurga por aquí y escarba por allá, y e
demonio que lo entienda... De pensar así a ser apostólico
proclamando esta gloriosa monarquía del porvenir, no hay más que un
paso. Le veo a usted en el buen camino y en jurisdicción apostólica.
El caballero no pudo reprimir la risa que estas palabras provocaron
en él.
—¡Yo apostólico! —dijo—. No espere tal cosa el señor don
Felicísimo. Para que eso suceda será preciso que Dios varíe m
natural ser, y arranque de mí la memoria. Esa forma nueva de
despotismo que se anuncia ahora será más brutal que cuantos
despotismos se han conocido, porque sobre todos sus inconvenientes
va a tener el de ser populachero. No es el absolutismo de Felipe II o
de Luis XIV, grande, aristocrático, batallador, adornado de mil glorias
militares y artísticas, y que disculpa sus atrocidades con grandes
empresas y conquistas de mundos; va a ser un sistema de mojigatería
y desconfianza, adicionado con todas las corruptelas de las camarillas
que vienen funcionando desde los tiempos de Godoy. Se alimentará
del suelo por dos grandes raíces, una que estará en las sacristías
claustros y locutorios de monjas, y otra que se fijará en las tabernas
donde se reúnen los voluntarios realistas. Va a ser una tiranía
ramplona que si es sufrida por nuestro país, lo que dudo mucho
pondrá a este en un lugar que no envidiará seguramente ninguna
región del África.
Al oír esto, don Felicísimo hizo un gesto tan displicente que su cara
se arrugó toda, y desaparecían los ojos, y los pliegues de sus labios se
extendieron, multiplicándose y describiendo un número infinito de
rayas hasta el último confín de las orejas.
—Según eso es usted liberal...
—Lo soy, sí señor, soy liberal en idea, y deploro que el país entero
no lo sea. Si no estuvieran tan arraigadas aquí las rutinas, la
ignorancia, y, sobre todo, la docilidad para dejarse gobernar, otro gallo
nos cantara. El absolutismo sería imposible y no habría apostólicos
más que en el Congo o en la Hotentocia. Por desgracia, nuestro país
no es liberal ni sabe lo que es libertad, ni tiene de los nuevos modos
de gobernar más que ideas vagas. Puede asegurarse que la libertad
no ha llegado todavía a él más que como un susurro. Es algo que ha
hecho ligera impresión en sus oídos, pero que no ha penetrado en su
entendimiento ni menos en su conciencia. No se tiene idea de lo que
es el respeto mutuo, ni se comprende que para establecer la libertad
fecunda es preciso que los pueblos se acostumbren a dos
esclavitudes, a la de las leyes y a la del trabajo. A excepción de tres
docenas de personas..., no pongo sino tres docenas..., los españoles
que más gritan pidiendo libertad, entienden que esta consiste en hace
cada cual su santo gusto y en burlarse de la autoridad. En una
palabra: cada español, al pedir libertad, reclama la suya, importándole
poco la del prójimo...
—Luego usted —dijo don Felicísimo, que ya había recobrado la
fijeza pétrea de su rostro— no es liberal al modo de acá.
—Lo soy al modo mío, según mi idea, y creo que estos principios
aprendidos donde no son solo principios, sino hechos, prevalecerán en
todo el mundo y conquistarán todas las tierras, incluso España; pero
cuando me detengo a calcular el tiempo que tardaremos en se
conquistados, me confundo, me mareo, porque cien años me parecen
pocos para tan grande obra. De aquí mi escepticismo, que no es
realmente escepticismo, sino tristeza. Creo en la libertad porque he
visto sus frutos en otras partes; pero no creo que esa misma libertad
pueda darlos allí donde hay poquísimos liberales, y de estos la mayo
parte lo son de nombre. España tiene hoy la controversia en los labios
una aspiración vaga en la mente, cierto instinto ciego de mudanza
pero el despotismo está en su corazón y en sus venas. Es su
naturaleza, es su humor, es la herencia leprosa de los siglos, que no
se cura sino con medicina de siglos. He visto hombres que han
predicado con elocuencia las ideas liberales, que con ellas han hecho
revoluciones y con ellas han gobernado. Pues bien: esos han sido en
todos sus autos déspotas insufribles. Aquí es déspota el ministro
liberal, déspota el empleado, el portero y el miliciano nacional; es
tiranuelo el periodista, el muñidor de elecciones, el juntero del pueblo y
el que grita por las calles himnos y bravatas patrióticas. La idea de
libertad, entrando súbitamente aquí a principios del siglo, nos dio
fórmulas, discursos, modificó algo las inteligencias; pero, ¡ay!, los
corazones siguen perteneciendo al absolutismo que los crió. Mientras
no se modifiquen los sentimientos, mientras la envidia, que aquí es
como una segunda naturaleza, no ceda su puesto al respeto mutuo, no
habrá libertades. Mientras el amor al trabajo no venza los bajos
apetitos y el prurito de vivir a costa ajena, no habrá libertades. No
habrá libertades mientras no concluya lo que se llama sobriedad
española, que es la holgazanería del cuerpo y del espíritu alimentada
por la rutina; porque las pasiones sanguinarias, la envidia, la
ociosidad, el vivir de limosna, el esperarlo todo del suelo fértil o de la
piedad de los ricos, el anhelo de someter al prójimo, la ambición de
sueldo y de destinos para tener alguien sobre quien machacar, no son
más que las distintas caras que toma el absolutismo, el cual se
manifiesta según las edades, ya servil y rastrero, ya levantisco y
alborotado.
—Según eso —dijo don Felicísimo confuso—, usted considera a
nuestro país inepto para las libertades. Por consiguiente, como no
puede haber más que dos clases de gobiernos, y el liberal es
imposible, tenemos que aceptar el absoluto.
—No —replicó el otro—, porque una ley ineludible arrastrará, ma
de su grado, a España por el camino que ha tomado la civilización. La
civilización ha sido en otras épocas conquista, privilegios, conventos
fueros, obediencia ciega, y España ha marchado con ella en luga
eminente; hoy la civilización, tan constante en la mudanza de sus
medios como en la fijeza de sus fines, es trabajo, industria
investigación, igualdad, derechos, y no hay más remedio que segui
adelante con ella, bien a la cabeza, bien a la cola. España se pone las
sandalias, toma su palo y anda: seguramente andará a trompicones
cayendo y levantándose a cada paso; pero andará. El absolutismo es
una imposibilidad, y el liberalismo es una dificultad. A lo difícil me
atengo, rechazando lo imposible. Hemos de pasar por un siglo de
tentativas, ensayos, dolores y convulsiones terribles.
—¡Un siglo!
—Sí, y esta es la causa de mi tristeza. Yo me encuentro en la mitad
de mi vida. He trabajado mucho por la idea salvadora; pero ya me
siento fatigado y me reconozco sin fuerzas para esta labor inmensa
que será cada día más dura. Otros vendrán que arrimen el hombro a
tan terrible carga. Yo no puedo más. Las circunstancias en que me
encuentro, solo, sin familia, lleno de tedio y viendo cuán poco hemos
adelantado en la cuarta parte de un siglo, me desaniman atrozmente
Reconozco que cuanto de mis fuerzas dependía ya lo hice; está m
conciencia tranquila y me retiro. Hasta hoy no he vivido para mí ni un
solo día. Llega la hora del egoísmo: necesito vivir un poco para mí. No
obteniendo gloria ni siquiera éxito, el sacrificio de mi existencia a un
ideal sería estéril; pues vivamos siquiera un poco y descansemos
Sobre las ruinas de mis quiméricas ambiciones se levanta hoy una
ambición grande, potente; la ambición de ser feliz, tener una familia y
vivir de los afectos puros, humildes, domésticos. ¡Es tan dulce no se
nada para el público y serlo todo para los nuestros! Apartado de la
política, deseando el olvido, miro a todas partes buscando un rincón en
que ocultarme y a donde no llegue el fragor de la lucha.
Don Felicísimo movía la cabeza sonriendo. Creía firmemente que e
caballero, su amigo y cliente, tenía la cabeza vacía de lo que llaman
seso; pues ¿qué mayor locura, en aquellos agitados días, que no se
apostólico, ni absolutista, ni siquiera liberal?
Ya iba a decir algo muy ingenioso sobre esta enfermiza manía de
no ser nada, absolutamente nada, cuando entró Pipaón, y estrechando
con ímpetu amistoso la mano del caballero, le dijo:
—Enhorabuenas mil, queridísimo amigo. Vengo de ver a Su
Excelencia, que ya ha leído las cartas que trajiste del señor don
Alejandro Aguado, marqués de las Marismas, y de su parte te aseguro
que puedes vivir aquí tan libremente como en el mismo París o
Londres. El señor Aguado, como soberano absoluto del dinero, es una
potencia de primer orden, una autoridad indiscutible. Ahora bien
considerando que el mencionado señor Aguado (Pipaón no
abandonaba jamás su estilo de expediente) garantiza bajo su palabra
de oro que vienes exclusivamente con la misión de comprarle cuadros
para su rica galería, y además a asuntillos tuyos que nada tienen que
ver con la política, se ha dado cuenta a Su Majestad de todo lo
actuado, y Su Majestad se ha servido disponer que no se te moleste
en lo más mínimo. Tendreislo entendido, y ahora, discreto amigo
ruégote que adoptes tu verdadero nombre y vengas a comer conmigo
a mi casa, donde encontrarás personas que más desean verte que
escribirte...
El caballero se levantó, y muy gozoso dijo:
—Confío sin vacilar en la libertad que se me ofrece, y recobro m
nombre.
XXVII
Tenía sus papeles en regla, pasaporte, partida de bautismo, a más

de otros documentos importantes, y aquel mismo día se celebró la
escritura para llevar adelante lo pactado con don Felicísimo, asistiendo
a este acto solemne, como notario, el licenciado Lobo, a quien
conocemos desde hace veinticuatro años. Por la tarde Pipaón se llevó
al amigo a su casa, donde le obsequió bizarramente con suntuosa
comida, cigarros exquisitos y licores de primera. Esta esplendidez y e
lujo de la vivienda admiraron mucho al convidado, que no podía menos
de traer a la memoria la humildad con que el señor Bragas dio los
primeros pasos en la carrera de covachuelista. El medro había sido
grandísimo y el aprovechamiento tan colosal, que allí podrían toma
lecciones cuantas hormigas hay en el mundo.
Los dos camaradas charlaron de lo lindo sobre cosas diversas; pero
especialmente sobre el destino y vicisitudes del amigo que por tanto
tiempo había estado ausente de España y envuelto en misterios. Las
preguntas sucedían a las preguntas y las explicaciones a las
explicaciones, y no fue todo paz y concordia en su interesante diálogo
porque a lo mejor de él hubo peligro de que los ánimos se
soliviantaran, dando al traste con la amistad y buena armonía
compañeras inseparables de una serie de buenos platos. Parece se
que el amigo había enviado a Pipaón, durante los últimos años, todas
las cartas que tenía que dirigir a Madrid. El objeto de esta mediación
era que el diestro cortesano salvara de las asechanzas de la policía en
Correos una correspondencia inocente en que nada se hablaba de
política. Así lo hizo durante algún tiempo; pero desde mediados del 29
don Juan Bragas, que en las cosas privadas, lo mismo que en las
públicas, había de mostrar la doblez y bajeza de su carácter, abusó de
la confianza del emigrado, dejando de entregar algunas de sus cartas
a la persona a quien se dirigían, para dárselas a otra.
La cuestión de las cartas salió, pues, a relucir en la mesa, y Pipaón
que en frescura y demás dotes para el fingimiento no tenía rival en e
mundo, se desenvolvió gallardamente de aquel compromiso. Su
sofistería, sus protestas de amistad, auxiliadas de su astucia, hacían
quiebros admirables, y no se dejaba él coger en mentira aunque la
lógica misma se encargara de acometerle.
—Puedes estar seguro, amigo Salvador —le decía—, de que desde
octubre del 29 no he recibido ningún paquete tuyo. Si lo recibiera
tonto, ¿para qué lo quería yo? ¿De qué podrían valerme tus cartas, no
trayendo nada de política? Y aunque trajeran algo, hombre, aunque
fuera cada letra de ellas una bomba explosiva, ¿me crees capaz de
vender a un amigo de la niñez? ¿Me crees capaz de abusa
indignamente de tu confianza? ¿Me crees capaz de violar e
sacratísimo misterio de la correspondencia...? ¡Oh!, no me des a
entender que hay en ti, no digo sospecha, pero ni siquiera un átomo de
sospecha, porque nace en mí cierta indignación terrible que me hará
olvidar la amistad, la consideración; me desvanezco, me exalto, me
sulfuro... No, tú no puedes tener de mí tan baja opinión, tú bromeas, tú
has perdido la memoria de mis buenas partes, y allá en la emigración
has olvidado lo arraigada que está la hidalguía en pechos españoles.
El amigo no se convenció con estas vehementes razones; pero no
queriendo volver sobre lo pasado, dejó aquel tema para tomar otro
Apremiado por Bragas, contó lo más notable de su vida durante las
largas ausencias, extendiéndose mucho en los dramáticos sucesos de
su expedición a Cataluña, durante la insurrección apostólica de este
país. Pasmado le oyó el buen cortesano, y cuando su amigo llegaba a
narrar un peligro extraordinario o el acometimiento de alguna aventura
terrible, temblaba y sudaba como si él mismo se sintiera empeñado en
aquellos grandes riesgos y compromisos; tal verdad e interés había en
la relación.
Ya estaban en los postres, cuando Pipaón, oído el relato de
convidado, contó a su vez los chascos que él (Pipaón) y otra persona
(Jenara) se habían llevado en Madrid, creyendo ver al buen amigo en
cada uno de los individuos que sucesivamente iba deteniendo la
policía por creerlos emisarios de Mina o Valdés.
—Como no recibíamos cartas tuyas —dijo—, y en tanto los
emigrados se agitaban en París y Londres, siempre que teníamos
noticia de la llegada misteriosa de algún conspirador, creíamos que
eras tú. En Gracia y Justicia me enteraba yo de los soplos de la
policía, y... francamente, como siempre tuviste afición a zurci
voluntades de revolucionarios y preparar sediciones..., no levantaban
una pieza los buenos podencos de la Superintendencia sin que Jenara
y yo dijéramos «él es». Cuando Espronceda vino y se escondió po
unas horas en la Trinidad, creímos que eras tú. ¿Llegó un tipo, un no
sé quién, y estuvo tres días en la botica de la calle de Hortaleza?...
pues eras tú. ¿Hablose de otro que se metió en el guardamangier de
Palacio, y que luego resultó ser un choricero perseguido por habe
dado una paliza?..., pues tú. ¿Súpose por los serenos que un hombre
encopetado había entrado a deshora varias noches en casa de
Olózaga?..., pues tú. Pero el más gracioso engaño fue el que padeció
nuestra paisanita durante la prisión de Olózaga, engaño en el cual no
he tenido parte ni responsabilidad. Ella sobornó carceleros y compró
mequetrefes de cárcel, de esos que traen y llevan recados. Esta gente
sirve bien, como anden las onzas por medio, y lo prueba la evasión de
Olózaga. Pues bien. En el torreón de la Villa había un preso a quien
daban el nombre de Escoriaza, el cual unas veces atribuía su
encerramiento a cosas de mujeres, y otras a tramas políticas
Intrigando para salvar a Olózaga, nuestra amiga, cuyo corazón es tan
grande como su entendimiento, se interesaba por el misterioso
Escoriaza, creyendo..., no podía faltar la muletilla..., creyendo que eras
tú. Él recibió recados y dineros, comprendió que había un engaño, y lo
sostuvo hábilmente. En fin, querido, a la postre resultó ser ese raterillo
a quien llaman Candelas, que si Dios no lo remedia, pasará a la
posteridad por sus hazañas. Mira, Salvador, cuando lo supe, estuve
riéndome dos horas... Por último, al cabo de tantas equivocaciones
vino la verdad, y la sin par Generosa, que te buscaba en todas partes
te encontró de improviso en su propia casa, en casa de don Felicísimo
Y fue de la manera más inesperada y más teatral. Un día vio sobre la
mesa de Carnicero una carta para don Jaime Servet, nombre que
usaste en Cataluña, según nos dijo el marqués de Falfán de los
Godos, que te encontró en Canfranc cuando volvías sano y salvo a
Francia. Al punto Jenara..., ya sabes que es un fuego vivo de actividad
y de impaciencia..., corrió a la posada del Dragón... ¡Qué desgracia!
no estabas... Pasaron días. La carta para ti volvió a la mesa de don
Felicísimo. Pero ayer nuestra amiga sintió una voz en el despacho de
Carnicero; ella y Micaela se acercaron, entreabrieron la puerta
miraron... Eras tú, tú mismo, real, verdadero, efectivo. Jenara se
desmayó en el pasillo; Micaela y yo la llevamos a su cuarto, donde, sin
más medicina que un vasito de agua, volvió en sí y de repente me dijo
entre riendo y llorando: «Ha engrosado bastante ese badulaque»... Y
en conclusión, chico, esta tarde tendrás el gusto de verla, porque para
eso estás aquí y para eso te he convidado de acuerdo con ella; y ya...
El cortesano miró el reloj, añadiendo con socarronería:
—No, no es hora todavía... ¿Llevarás a mal lo que he hecho? ¡Qué
demonios! Si supieras el interés que tiene por ti... Te quiere como a un
hijo.
Salvador no dijo cosa alguna concreta acerca de este inopinado
amor de madre que la señora le tenía, y volviendo al tema pasado
riose mucho de los lances cómicos ocurridos con su supuesta
persona, y principalmente de haber sido confundido con dos hombres
que habían de ser pronto celebridades del siglo, si bien de orden muy
distinto: Espronceda y Candelas. Dijo luego que al volver a Francia de
vuelta de Cataluña, había seguido ayudando a Mina en sus planes
pero que, desde la intentona del año 30, había cesado en sus trabajos
renunciando para siempre y con decidido propósito a la política. Desde
que tal resolución tomó, habíase aplicado a buscar los medios de
volver libremente a España, donde le llamaban afectos nobles y una
regular herencia por recoger. Tuvo la suerte entonces de conocer a
don Alejandro Aguado, el cual le empleó en diferentes comisiones en
Bélgica e Inglaterra. Sirvió con celo y habilidad al banquero, y este se
encargó de abrirle las puertas de España. Quiso traerle cuando vino
Rossini en marzo del 31; pero entonces no fue posible. A la vuelta de
Aguado a Francia, el célebre contratista dio a Salvador el encargo de
reunirle cuadros para su afamada colección (que hoy puede admirarse
en el Louvre), y a fin de hacerle posible la residencia en España
escribió en su obsequio cartas de recomendación, de esas que todos
los obstáculos allanan, y vencen dificultades que al oro mismo son
rebeldes. Aguado era el prestamista del Tesoro español; tenía en su
mano la fortuna pública y gran parte de la privada de esta nación
venturosísima. Por estas causas, sus relaciones en Madrid eran
sólidas, y su firma como una especie de fórmula abreviada de
evangelio.
A principios de 1831 tuvo don Felicísimo correspondencia con
Aguado, con motivo de ciertos negocios de los Santos Lugares que
este arregló en París y Roma. Concluidas y zanjadas las cuentas a
gusto de ambos, lo mismo el banquero que el agente eclesiástico
deseaban ocasión de servirse mutuamente, y como en poder de
Carnicero obraba todavía una cantidad, resto de la negociación
realizada y de la cual debía disponer Aguado, este suplicó a su amigo
la entregase al señor don Jaime Servet, su deudo y corresponsal, que
llegaría a Madrid en época concertada. Reservadamente enteraba
Aguado a Carnicero de quién era este Servet y de su verdadero
nombre, así como de los propósitos pacíficos que llevaba a Madrid
por lo cual esperaba que le ayudase en todo. Con esto y con las cartas
que Salvador trajo para Calomarde, Varela, Ballesteros y la reina
Cristina, no fue difícil que al llegar a Madrid dejase su falso nombre
entrando en el pleno goce de lo que podría llamarse derechos civiles, y
que era en realidad tolerancia o benignidad del gobierno absoluto. La
carta para Cristina, que entregó el primer día, fue, como es de
suponer, eficacísima, y todo lo demás se le hizo fácil. Ya tenemos
noticia de las buenas disposiciones de Carnicero, el cual miraba a
señor Aguado como a un Dios; pues en aquel espíritu el furo
apostólico no excluía la adoración de becerros de oro con todos los
servilismos que este culto insano trae consigo.
Ya habían concluido de comer y estaban de sobremesa fumando
excelentes puros, cuando sonó la campanilla, y Pipaón dijo a su
amigo:
—Me parece que ya está ahí. Es puntual como la hora triste.
Salvador hizo una pregunta interesante por demás, a la cua
contestó el tunante de Pipaón con sonrisa maliciosa y en voz tan baja
que el narrador se quedó en ayunas. Es evidente que la pregunta se
refería a la señora que en aquel momento a la puerta llamaba, y
también lo es que Pipaón contestó con un nombre. Lo único que
pudimos percibir de este oscurísimo coloquio, fue la observación de
Salvador, diciendo:
—Me lo figuré... Le vi en Francia... ¡Qué cosas!
Era ella, en efecto. Salvador, dejando a su amigo, fue a la sala
donde la encontró de pie, fijos los ojos en la puerta. Se saludaron con
afecto, demostrándose el uno al otro sentimientos de amistad y alegría
por verse después de tanto tiempo. En ella había cierto alborozo de
alma que luchaba por encerrarse en el círculo de lo que se llama
satisfacción en lenguaje de urbanidad, y en él había frialdad que se
mostraba de improviso, rompiendo el velo de expresiones
convencionales con que las quería cubrir. Ella estaba turbada, tan
turbada, que después de los primeros saludos decía una cosa por otra
él no parecía sereno, pero se recobró antes que ella, y fue el primero
que rio. ¡Sabe Dios cuál sería el último!
La discreción, que en el uno emanaba naturalmente del desamor y
en la otra del remordimiento, les llevó a una conversación en que n
por incidencia se tocó ningún punto de la vida pasada de ambos
Hablaron del tiempo y de política, los dos temas obligados en toda
reunión donde no hay nada de qué hablar. Allí parecía más bien que
ella y él temían abordar otros asuntos. Lo único que se permitió
Jenara, fuera de los lugares comunes de la política y el tiempo, fue
algunas exhortaciones que demostraban bastante interés por el que
fue su amigo.
—No te fíes de esta gente, ni de la buena acogida que te han hecho
—le dijo—. Esta canalla es más temible cuanto más halaga, y cuando
parece que perdona, es que prepara el golpe de muerte. La protección
de la reina Cristina, que tanto considera al señor Aguado, te servirá de
mucho mientras haya tal reina; pero, hijo, aquí no hay nada seguro
estamos sobre un abismo. Al rey le repiten ya con más frecuencia los
ataques de gota, y el mejor día nos quedamos sin él. Ya supones lo
que pasará en la botella de cerveza el día que le falte el corcho
Muerto el rey, adiós reina y Roque; se armará aquí una marimorena de
todos los demonios; el bando apostólico será dueño del reino y nos
hará gustar las delicias del gobierno de Cafrería. Como no me resigno
a que me gobiernen a la africana, tengo todo preparado para marcha
en cuanto haya síntomas; así, desde que el rey cojea del pie izquierdo
ya me tienes haciendo las maletas. Prepárate tú también, y no te fíes
de la protección de Cristina, un ídolo a quien derribará de su pedesta
el último suspiro del rey.
Conviniendo en muchas de estas apreciaciones, respondió
Salvador que por nada del mundo volvería a la emigración, y que
resuelto a huir de la política, esperaba que nadie le molestaría. No
queda duda alguna de que la hermosa dama, oyéndole hablar, sentía
en su alma eso que no se puede designar sino diciendo que la
agobiaba un formidable peso. Claramente decían sus ojos que tras de
la fórmula artificiosa y vana que articulaban los labios, había una
reserva de palabras verdaderas, que al menor descuido de la voluntad
saldrían en torrente diciendo lo que ellas solas sabían decir. Que se
echara fuera, por capricho o audacia, una palabra sola, y las demás
saldrían vibrando con el sentimiento que las nutría. Por un instante se
habría creído que el volcán (demos al fenómeno referido su
convencional nombre metafórico), llegaba al momento supino de la
erupción, echando fuera su lava y su humo. Salvador tembló al ver con
cuánto afán, digno de mejor motivo, contaba la señora las varillas de
su abanico, pasándolas entre los dedos cual si fueran cuentas de
rosario, y mirándolo y remirándolo como si él también hablase
Después alzó la dama los ojos, que empañados tenía, cual si fluctuara
sobre aquel cielo azul la niebla del lloriqueo, y echando sobre su
amigo una mirada que era más bien explosión de miradas, desplegó
los labios, empezó una sílaba, y se la tragó en seguida juntamente con
otras muchas que estaban entre los lindos dientes esperando vez. La
señora se sometió a sí misma con formidable tiranía, y en vez de
aquello que iba a decir, no dijo más que esto:
—Hoy me han regalado una cesta de albaricoques.
A esta noticia insignificante contestó Monsalud diciendo que a él le
gustaban poco los albaricoques, y que delante de un racimo de uvas
no se podía poner ninguna otra especie de fruta. Con esto se empeñó
un eruditísimo coloquio sobre cuáles eran las mejores frutas
defendiendo la señora, con argumento irrebatible, el melón de Añove
y los albaricoques de Toledo, pasando la conversación a los
Cigarrales, y, por último, a don Benigno Cordero, a cuya obsequiosa
amistad debía Jenara la cestilla mencionada. Entonces el otro dio en
hacer preguntas y más preguntas sobre la honrada familia de
encajero, y Jenara dio en responderle con malísima gana y con tanta
avaricia de palabras como liberalidad de movimientos para darse aire
con el abanico. Creeríase que se estaba azotando el seno para
castigarle de haber engrosado más de la cuenta, y así todos los
faralaes de su vestido en aquella parte se agitaban como flámulas y
gallardetes en día de festejo y de temporal. De repente la señora cortó
la conversación diciendo:
—Son las seis, y Micaelita me espera para ir al Prado. Yo estoy libre
también; ya me ha dicho hoy don Felicísimo, por encargo del esposo
de la jorobada (Calomarde), que se acabó la tontería de m
persecución.
Salvador manifestó alegrarse de tal franquicia, y no dijo sino
palabras frías y convencionales para retener a la dama en la visita
También habló de su próximo viaje a Toledo. Levantose ella, y sus
bellos ojos ya no echaban de sí sentimientos amorosos, sino un
chisporroteo de orgullo. Despidiose secamente diciéndole: «Nos
veremos otro día»; y se retiró majestuosa, como soberana que no
sabe lo que es abdicar, y antes consentirá en equivocarse mil veces
que en ceder una sola.
XXVIII
A principios de septiembre, todavía el benignísimo don Benigno no

había podido allanar aquel endiablado obstáculo de los papeles. Nada
de provecho contestaba el agente, y todo era dilaciones, por lo cua
Cordero, que ya iba perdiendo la paciencia, determinó hacer un viaje a
Madrid para comunicar algo de su inquietud y de su prisa al seño
Carnicero. El héroe había resuelto encontrar los papeles, aunque
tuviera que ir por ellos a la misma villa de La Bañeza o al fin de
mundo. Así lo dijo al partir, despidiéndose para poco tiempo.
Dos días después de su partida estaba Sola en una de las piezas
altas, ocupada, por más señas, en pegar botones a una camisa de su
futuro esposo, cuando recibió aviso de que un señor acababa de llega
a la finca y deseaba hablar con la señorita. Comprendiendo al punto
quién era, Sola se quedó como estatua, sin habla, sin ideas en la
cabeza, sin sangre en las venas, sintiendo una alegría disparatada
que al mismo tiempo era pena muy viva, y miedo y cortedad de genio
Ella sabía quién era el visitante; se lo decía aquel mismo azoramiento
súbito en que estaba, y el horrible salto de su corazón alarmado. Tuvo
noticia por don Benigno, dos semanas antes, de la aparición de
Salvador en Madrid, padeciendo con esto un trastorno general en sus
ideas. Pocos días después había recibido una carta del mismo
anunciándole visita, y desde que recibiera la carta, el barullo de sus
ideas y la estupefacción de su alma habían aumentado. Grandes
cosas se preparaban sin duda, anunciándose en la infeliz joven con
sentimientos de miedo y espasmos de alegría. Armándose de valor, se
dispuso a recibir al que un tiempo se llamó su hermano. Mientras se
arreglaba un poco para presentarse a él, miró por la ventana. Allá
abajo, entre los olivos, había un caballo, sujeto por un muchacho de la
casa. Era el caballo de él. La puertecilla de la huerta, donde se pasaba
para llegar a la casa, estaba abierta. Él la había dejado abierta a
pasar. En la salita baja se sentían pasos. Eran sus pasos.
Sola bajó, apoyándose fuertemente en el barandal para no bajar de
cabeza. Entró en la salita... ¡Qué grueso, qué moreno!... ¡Tenía
algunas canas!... Sola no pudo decir nada, y se dejó abraza
fuertemente.
—¡Ay! —exclamó sintiéndose inerte entre los brazos de su
hermano, que parecían de hierro.
Sola no se hacía cargo de nada. Estaba pálida y con los labios
secos, muy secos. No se dio cuenta de que él se sentó en un sofá de
paja, que era el principal adorno de la salita; no se dio cuenta de que
él, tomándole las manos, la llevó al mismo sofá y la sentó allí como se
sienta una muñeca; no se dio cuenta tampoco de que Salvador dijo:
—Ya sé que no está don Benigno; ¡cuánto lo siento!
Sola no hacía más que mirarle asombrada, encontrándole grueso
no tan grueso que perdiera su gallardía de otros tiempos; asombrada
de verle mucho más moreno y curtido que antes y con algunas
manchas de canas en el cabello.
—¡Me miras las canas! —dijo él—. Estoy viejo, hermana, viejo de
todo. A ti te encuentro más guapa, más mujer, más saludable. Ya sé
que eres tan buena como antes o más buena aún, si cabe. El marqués
de Falfán me ha hablado mucho de ti, y me contó tu grave
enfermedad. ¡Pobrecita! También sé que no has recibido mis cartas
desde hace dos años, como no las recibió Falfán ni otros amigos míos
Es una traición de Bragas, aunque él jura y perjura que no ha recibido
paquetes míos en mucho tiempo. La última carta que me escribiste, la
recibí en Inglaterra hace dos años. Después, yo escribía, escribía, y tú
no me contestabas.
Hablaron un rato de aquel extravío de cartas, que no podía ser sino
pillada de Pipaón, falaz intermediario; pero como ya el mal había
pasado, no tenía remedio; dejaron de hablar de ello para ocuparse de
cosas más vivas y más interesantes para uno y otro.
—¡Cuántos años sin verte! —dijo él mirándola de tan buena gana
que bien se conocía el largo ayuno que de aquellas vistas habían
tenido sus ojos.
—El marqués de Falfán —repitió ella—, que iba algunas veces a la
tienda de don Benigno y siempre me hablaba de ti, me contó que
pasando él la frontera cierto día del año 27 te encontró. Ibas a caballo
disfrazado, y te habías puesto el nombre de Jaime Servet. Este
nombre se me quedó tan presente, que lo dije muchas veces cuando
estaba delirando. Después de esto me escribiste desde París. Un día
que fuimos a ver entrar a la reina Cristina a casa de Bringas, me dio
Pipaón una carta tuya; fue la última. Poco después, el marqués de
Falfán me dijo que tenía ciertos indicios para creer que habías muerto.
Salvador le contó luego a grandes rasgos los principales sucesos
de su vida en el período de ausencia, y le explicó las causas de su
venida a España. Lo que más sorprendió a Sola de cuanto dijo su
hermano, fue aquel aborrecimiento a la política y al conspirar. Salvado
le dijo:
—Cuando el hombre se enamora desde su niñez de ciertas ideas, o
sea de lo que llamamos ideales..., no sé si me entiendes..., y se lanza
a trabajar en ellos, se crea una vida artificial. Las ambiciones, la sed
de gloria y el afán de todos los días la forman. Así pasa el tiempo y as
consume el hombre las fuerzas de su alma en un combate con
fantasmas. Cuando hay éxito, querida hermanita; cuando Dios dispone
las cosas para que determinados hombres en determinados países
sean instrumentos de planes providenciales, entonces la vida que he
llamado artificial puede dejar de serlo, mudándose en realidad
hermosa. Pero cuando no hay éxito, cuando después de mucho
desvarío hallamos que todo es quimera, sea por el tiempo, por el lugar
o porque realmente no valemos para maldita de Dios la cosa, resulta
uno de estos dos fenómenos: o la desesperación, o el recogimiento y
el deseo de la vida vulgar, tranquila, compartida entre los afectos
comunes y los deberes fáciles. Yo he querido optar por lo segundo
que es más natural. Un poeta, hablando de estas cosas, dijo: Es como
una encina plantada en un vaso: la encina crece y el vaso se rompe
Yo creo que en la generalidad de los casos hay que decir: El vaso es
muy duro y la encina se seca, y este es el caso mío, querida.
Sola dio un suspiro por único comentario.
—La encina se seca —añadió Monsalud—. En mí se empezó a
secar hace tiempo, y ya quedan en ella muy pocas ramas con vida
pero a su sombra ha nacido un árbol modesto que vivirá más, y a falta
de laureles dará frutos... Pronto tendré cuarenta años. ¡Si vieras tú qué
efecto tan raro nos hace el vernos cerca de esta edad y reconocer que
no hemos vivido nada en tan larga juventud! Porque un hombre puede
haber emprendido muchas cosas, haber estudiado, leído y habe
querido a muchas mujeres, y, sin embargo, encontrarse el mejor día
con la triste seguridad de no ser nada, ni saber nada, ni amar a nadie
Pronto empezaré a ser viejo. ¡Qué triste cosa es la vejez sin otros
goces que las memorias de una juventud alborotada, ni más compañía
que el rastro que dejaron todos aquellos fantasmas y figurillas a
convertirse en humo!... Se me figura que comprendes esto
perfectamente... ¿Pero a que no sabes cuál es ahora la aspiración de
mi vida?
—Ya me lo has dicho, no ser nada.
—Pues aspiro a ser el vecino tal, de tal calle, de cuál pueblo; nada
más que un vecino, querida. ¿Crees que esto es fácil? Mira que no lo
es. La vida errante me fatiga, la vida solitaria me entristece. Para se
vecino de tal calle, es preciso fijarse y tener compañía que nos ate con
cuerda de afectos y deberes. No hay nada que tan dulcemente abrume
al hombre como el peso de un techo propio.
Esta frase, dicha así como sentencia, conmovió a Sola hasta lo más
profundo de su alma. Por un momento creyó que todo se volvía negro
en su alrededor.
—¿Qué dices a esto? —le preguntó él—. Hace un año, hallándome
en París, curado ya de la manía del vivir quimérico, y prendado de
amores por la vida posible, por la vida que no temo llamar vulgar, te
escribí manifestándote lo que pensaba.
—¡A mí! —exclamó Sola, figurándose en el acto, como po
inspiración divina, la carta que no había recibido, y viéndola toda letra
por letra.
—A ti... Ya sé que no la recibiste. Sería preciso desollar vivo a
Pipaón. En mi carta te consultaba, te pedía consejo. Fue aquel un
tiempo en que tú te realzabas a mis ojos de un modo nuevo, y no iba
mi pensamiento a ninguna parte sin tropezar contigo. Siempre había
admirado yo tus virtudes, siempre había sentido por ti un afecto
entrañable; pero entonces todos los sueños de la vida posible venían a
mi cerebro como envueltos en ti; quiero decir que todas las ideas de
esta nueva existencia y las imágenes de mi reposo y de mi felicidad
futura, se me presentaban como un contorno de tu cara. Esto es
concluir por donde otros han empezado, esto es cosa de mozalbetes
pero los que no han sabido vivir la vida del corazón cuando niños, la
viven cuando viejos, y así...
La miró un rato, y viéndola perpleja, él, que gustaba de expresar las
cosas con prontitud y claridad, le dijo en un galanteo máximo todo lo
que tenía que decirle. Sus palabras fueron estas:
—Y así, vengo a proponerte que nos casemos.
Sola no estaba ya confusa, sino espantada. Se mordía un labio y la
yema de un dedo. Se los mordía tan bien, que a poco más arrojara
sangre. Al mismo tiempo miraba al suelo, temerosa de mirar a otra
parte. Su alma estaba, si es permitido decirlo así, como una grande y
sólida torre que acababa de desplomarse sacudida por terremotos. No
acertaba a pensar cosa alguna derechamente, ni a concretar sus ideas
para formar un plan de respuesta. Salvador le tomó una mano
Entonces ella, herida de súbito por no sé qué sentimiento, por el pudor
por la dignidad tal vez, o quizás por el miedo, retiró su mano y dijo:
—Soy casada.
—¡Tú!...
—Como si lo fuera. He dado mi palabra.
—En Madrid me dijeron eso como una sospecha. Yo creí que era
falso.
—Es cierto —dijo Sola que, recobrándose con gran esfuerzo
luchaba con sus lágrimas para que no salieran—. Si no hubieran
ocurrido ciertos entorpecimientos, ya estaría casada con el mejor de
los hombres.
A Salvador tocó entonces morderse el labio y la coyuntura del dedo
índice de su mano derecha. Sola invocó mentalmente a Dios, tomó
fuerzas de su valeroso espíritu y de la idea del deber, que era siempre
su confortante más poderoso, y quiso dominar la situación haciendo e
panegírico de su futuro esposo.
—Hay un hombre —dijo— a quien debo la vida, de quien he sido
hija cuando no tenía padre ni hermano. Siente por mí un respeto que
yo no merezco, y un cariño que no podré pagar con cien vidas mías
Cuantos miramientos, cuantas atenciones se puedan tener con una
persona amada, ha tenido él para mí. Yo he pedido a Dios que me
diera algo con que poder pagar beneficios tan grandes, y Dios ha
puesto en mi corazón lo que me hacía falta. Ese hombre ha querido
tener casas, tierras, criados, para que yo fuera señora de todo, y é
mío por toda la vida.
Salvador miró por la ventana los árboles, la deliciosa paz y
abundancia que todo aquel conjunto rústico expresaba. Sintió e

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Real Estate Investment and Finance:

Strategies, Structures, Key Decisions

About the Authors xxiii

3.2.6 The Relationship Between Rental Value and Rental Income 97

4.3.4 Real Rental Growth 128

5.3 The Discount Rate 153

7.3 Developing a Pro Forma Income Statement 190

8.6.4 Converting from the Contract Rate to the

11.5 Liquidity and Valuation Issues 291

12.6 Private Equity Structures in the Credit Crisis 319

14.4 Wall Street Act II: Senior-Subordinated Securities,

16.7.3 Putting Theory into Practice 433

17.6 Attribution and Portfolio Management: Alpha and Beta 474

At either end of the spectrum, or anywhere in between, investors should be aware

PART I: REAL ESTATE AS AN INVESTMENT: AN INTRODUCTION

PART II: MAKING INVESTMENT DECISIONS AT THE PROPERTY LEVEL

PART III: REAL ESTATE INVESTMENT STRUCTURES

PART IV: CREATING A GLOBAL REAL ESTATE STRATEGY

1.1 THE GLOBAL PROPERTY INVESTMENT UNIVERSE

Real estate is usually identified as a discrete, or separate, component of an investment

TABLE 1.1 The global property investment universe ($ billion)

Sources: PFR, PGIM, IMF, and EPRA 2019.

The US institutional real estate investment market is measured by the National

TABLE 1.2 The global capital stack

Source: DTZ (2015).

1.2 MARKET PLAYERS

Norway Norway Government $1,053bn Yes $30bn

Insurance companies remain important, as do high net worth individuals operat-

Japan Japanese Government $1,552bn Yes $77bn

TABLE 1.4 (Continued)

It can be difficult to distinguish between a sovereign wealth fund, such as the

1.2.2 Fund Managers

1.3 PROPERTY – ITS CHARACTER AS AN ASSET CLASS

1. The operational difficulties of holding property, including illiquidity, lumpiness

1.3.1 Property Depreciates

1.3.2 Lease Contracts Control Cash Flows

Unlike equities, property’s income stream is governed by lease contracts, and,

1.3.3 The Supply Side is Inelastic

1.3.4 Valuations Influence Performance

In the absence of continuously traded, deep, and securitised markets, commercial

1.3.5 Property is Not Liquid

France 0.6% 1% 6.7–7.3% 8.6%

Source: CBRE Global Investors.

1.3.6 Large Lot Sizes Produce Specific Risk

Property is heterogeneous, meaning that an investment can do well when markets

1.3.7 Leverage is Commonly Used in Real Estate Investment

Exit yield IRR IRR on equity

7.50% 12.00% 18.77%

Source: Baum and Crosby (2008).

The history of ungeared direct property returns, such as is produced by IPD in

1.3.8 Property Appears to be an Inflation Hedge

Average UK yield 10 yr index linked gilt yield

Tenía sus papeles en regla, pasaporte, partida de bautismo, a más

A principios de septiembre, todavía el benignísimo don Benigno no

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