A publication of Winter issue 2015 sponsored by CRE Finance World Winter 2015 25 First, CMBS investments are liquid making them effective portfolio allocation tools. The securities are easily divisible to customize and manage portfolio risk. CMBS can also be adroitly used to fill portfolio allocation gaps while earning current income. Equity investments, on the other hand, depending on the format (standalone transaction or private equity fund structure) may require three-to-six months to properly market and sell (for a stand-alone investment) and, in the case of private equity, may be subject to a restrictive lock-up period. Further, “bite-sizes” are difficult to control as a typical equity investment is “all-or-none” and not divisible by tranching. Additionally, CMBS is a materially easier way to deploy investment capital as compared to direct equity investing due to its liquidity and the approximately $1 billion of average daily trading volume. Second, CMBS investing is confidential. Investments in CMBS, whether in the primary or secondary markets are confidential as there is no “deed-of-record” as there is with a direct property acquisition. By way of example, an investor could acquire various tranches of Hilton Hotels, including distinct pools of specific assets, often in $100+ million increments, without any press coverage. However, the direct acquisition (equity) or sale of any of these assets would receive substantial media attention. CMBS investing therefore allows investors a way to discreetly invest, accumulate and dispose of trophy assets (through trading the related CMBS debt), without signaling their portfolio positions to the marketplace. Attribute #5 – CMBS Provides Current Income and is Easily Hedged A compelling attribute of CMBS is its current contractual income that is paid monthly. Further, investors are able to choose between floating-rate and fixed-rate assets and can customize duration by CMBS vintage to best fulfill their asset/liability needs. Because fixed-rate CMBS benefits from strict call-protection (protection from early repayment), interest rate risk can be easily and accurately hedged, if need be. The current income component of CMBS is highly complementary to the typical “J-Curve” of traditional property investing where substantially all of the return is harvested upon realization. Therefore, CMBS can play an important role in portfolio management by off-setting the J-Curve often associated with real property ownership through its current income. Conclusion Foreign investors seeking exposure to the U.S. property market should consider CMBS as an essential component of their U.S. real estate investment strategy. For a newer entrant, CMBS, as compared to direct property investing, provides a tax-efficient means of participating in the market at attractive valuation points while also providing current income, liquidity, confidentiality and market access/visibility. As illustrated in the table below, compared to traditional direct property investing, CMBS offers numerous competitive advantages. Exhibit 5 Competitive Advantages of CMBS vs. Real Estate Equity For the foreign investor that may already have U.S. property exposure, CMBS provides current income to off-set their “J-Curve” direct investments. CMBS also provides an efficient means for an investor in a private equity fund to effectively “co-invest” (through the CMBS) in assets where the investor seeks increased exposure. Additionally, existing investors benefit from CMBS by gaining valuable exposure and insight into markets that may lead to follow-on investments via direct equity. Exhibit 6 Comparative Financial Indices Pre/Post Financial Crisis Sources: Bloomberg, NAREIT, Talmage Research In all, for the variety of reasons outlined above, CMBS should play a role for off-shore investors in their U.S. real estate allocation, either as an attractive and efficient stand-alone entry-point investment or as an easily managed and liquid current pay complement to their existing portfolio of equity investments. Lastly, CMBS, as illustrated above, remains cheap to other U.S. indices as it has yet to fully recover from the global financial crisis, hence making investment in the asset class opportune. U.S. CMBS — Five Compelling Attributes for Foreign Investors
CREFW-Winter Edition
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