The property portfolio management process involves six basic steps:
1. Determination of the basic objectives
2. Development of most appropriate real estate investment strategies that are most likely to achieve these objectives
3. Determination of most suitable business and legal structures
4. Implementation of the chosen strategies
5. Continous monitoring of:
- market conditions
- individual asset performance and operations
- aggregate portfolio performance
6. On-going proactive portfolio management and strategy re-adjustments to changing market conditions and actual performance results
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Selecting Portfolio Strategy
With the basic objectives at hand then the appropriate investment strategy will be selected in terms of:
-Location
-Asset type (land banking, land development, completed property)
-Property type (office, retail, industrial, residential, hotel, resort, infrastructure, medical)
-Leasing risk to be undertaken
-Degree of location diversification concentration
-Extent of use of borrowed funds
-Minimum size of investment
Continuous market and portfolio performance monitoring is required in order to evaluate whether portfolio performance is on track with stated objectives and whether portfolio adjustments are needed due to changing market conditions. Continous market monitoring and regular re-assessment of property/pofrtfolio returns should be carried out by updating the assumptions of the model used to reflect changing market conditions.
Diversification Strategies
An important part of property portfolio management is the development of a balanced strategy of diversification across property types and locations.
Historical data indicate that real estate investment performance varies across property types and metropolitan markets. Thus, a balanced diversification of real estate investments across several metropolitan markets and property types that have exhibited notable differentiation in terms of investment performance entails less risk than the concentration of investments in a single metropolitan area unless it is believed that the subject metropolitan area has best prospects and significantly lower risk than any other metropolitan area. However, since no one can exclude with certainty, unpredictable developments, especially in this global economy, in which international and regional trends may have a singificant effect on local economies, diversification across markets whose economic base differs considerably is in theory less risky than concentration of all property investments in a single metropolitan market. Although, historical data show that in a national recession most metropolitan markets are affected negatively, such negative effect differs considerably in terms of magnitude across market, thus still justifying location diversification.
More advanced applications for the development of property portfolio diversification strategies across property types and metropolitan areas draw from the Modern Portfolio Theory introduced by Markowitz. This model can help the analyst take into account the different real estate market prospects of each market (as it requires return forecasts for each market), the differential risk of each market (as it requires risk measures for each metropolitan area or location) and how strongly is real estate investment performance in one market is related with real estate performance in other markets that are included in the model. For a more elaborate discussion on this read this article.
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Property Investment: Principles and Practice of Portfolio Management
Modern Real Estate Portfolio Management
How to Build a £4 Million Property Portfolio
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