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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 89 Chart 2 Momentum Strategy Performance Graph Charts 3 and 4 below summarize the comparative performance of the different strategies: Chart 3 Real Estate Strategy Performance Comparison Chart 4 Real Estate Strategy Performance Comparison Value and Momentum Working Together Now that we know that both value investing and momentum investing have worked in the past, it is interesting to analyze how they work, particularly in regards to key real estate investment considerations such as time horizon, liquidity (geography and asset size), and leverage. Time horizon Value investing relies on mean revision, which can often take several months (or even years) to materialize. This requires great fortitude, as the investor sees his positions decline rapidly and property net operating income (NOI) fall before seeing the thesis eventually play out. One example is the recent Global Financial Crisis. After a long period of over-valuation leading up to the financial crisis, valuations finally started to appear attractive from October 2008 (following the collapse of Lehman Brothers). However, this purchase was not rewarded immediately, as the strategy suffered a 40% drawdown before rebounding strongly in the recovery to outpace momentum (see Chart 5 below). Chart 5 Comparative Performance During Financial Crisis Meanwhile, momentum is a metric that is agnostic to intrinsic value, and a predictor only of short-term returns. This can be beneficial during periods of general overvaluation, where strong buying demand pushes prices higher. For example, during the period leading up to the Great Financial Crisis, value signals would have Should All Real Estate Investors Be Value Investors?


CRE Finance World, Winter 2014
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