"By Failing to Prepare, You are Preparing to Fail"

"By Failing to Prepare, You are Preparing to Fail"

Prashant Das Prashant Das

Prashant Das

Chairperson (Finance & Accounting) | Assoc. Professor (Real Estate) at IIMA

发布日期: 2017年11月27日
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(Original Quote from Benjamin Franklin)

Christophe Piffaretti, the Director of the Credit Suisse Real Estate Fund Hospitality and Zoltan Szelyes, the Head of Global Market Research at Credit Suisse Asset Management Global Real Estate served as Jury members for “Opes Helvetica”, a real estate fund management case study assigned to the Masters of Global Hospitality Business (MGH) program at the Ecole de Lausanne (EHL), Switzerland.

Christophe, the protagonist in this case study is the fund manager of a virtual real estate fund Z which has CHF 1Bi equity stake in the direct real estate in Switzerland, primarily in hospitality-focused assets. Z hires a boutique investment advisory firm Opes Helvetica which has to pitch a new asset mix to Christophe. Students played the role of Opes Helvetica analysts in six independent teams.

Based on extensive analysis, students critique the current mix of assets and provide an actionable recommendation for selling, partially selling of replicating certain assets. However, a more exciting part of the project is where the students allocate the excess capital to be freed-up by selling some assets into a new set of assets they propose.

“You get only one chance to make a first impression”, said Christophe Piffaretti implying the need for building one’s command on the contents of analysis, developing an appealing “story” and not get carried away by academic nuances. “Remember, the failure to prepare is your preparation to failure”, added Zoltan stressing on the need for a sound grasp on analytics. While Christophe offered pin-pointed observations related to direct hotel investments, Zoltan complimented the discourse with macroeconomic considerations.

Valuing real estate assets frequently is an integral part of managing such funds. A query was raised: “how far could one go in the future to project cash flows for discounting (i.e. DCF) analysis, Five years? Ten years? More?” Christophe responded by suggesting that 4-5 years of cash flow projection is realistic in the case of individual asset or portfolio. The latter cash flows may be difficult to project using the line items such as the rents, occupancy rate, and expenses. “So, it may be a bit pretentious to project cash flows for more than 10 years,” someone opined.

 “If, however, you are assessing a market, going far back in the past may still be a good idea, as economic cycles are a reality”, argued Zoltan, “because it is important to see how the correlation across asset classes evolved over market booms and downturns”. He advised the students to be careful about exchange rate risks and incorporate it into return calculations when diversifying internationally. Besides, the two experts stressed the need to study the past performance beyond the graphical trends. Forecasts based on simply extrapolating the trends is a mistake. One must also look at the fundamentals -the supply of real estate in particular- to tell whether an upward swing is sustainable or headed towards a bubble.

Christophe offered practical implications and limitations of applying the portfolio theory into direct real estate investments. For example, “what do you do if the rebalancing exercise asks you to allocate more capital to an asset than your current equity stake?” An obvious issue with this approach is that by buying down the debt by equity may change the leverage ratio in that asset, and eventually alter the leveraged return. Besides, it may be a practical challenge to find another asset to invest in with similar cash flow performance and capital structure. “Heterogeneity of real estate assets is as much a challenge as it makes our task more fun”, added, Zoltan. Christophe was cautious about the idea of replacing direct real estate investment by REITs, common stocks or bonds. “Unlike mutual funds, a real estate fund manager may actively manage the asset and influence its performance. The monetary incentive that the fund manager generates from managing the real estate assets may narrow the gap between an asset’s performance and an investor’s returns.”

The two expert guests agreed that similar to any other task, fund management is as much a science as it is art. There is room for subjective judgment in addition to quantitative analysis. Above all, “Life is short and you must enjoy what you do” said Zoltan: a precious mantra for career planning in general and real estate fund management in particular.

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#3continents3semesters, #MasterGlobalHospitality, #EHLMaster, #EHLNews

Thank Christophe Piffaretti, Zoltan. Szelyes, CFA, CAIA, Vera Schneider, @ Sophie Linguri Coughlan, Antonio Gómez López, Dr. René-Ojas Woltering, Stéphanie Melinda Müller

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Prashant Das

Asstt. Professor of Real Estate Finance at EHL, Switzerland

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