Investors' capital allocation into office and residential markets in ...

Opportunistic investors’ strategy is to focus on capital growth by investing in properties
which need some renovation/improvements on mature markets or in high-quality
properties in emerging markets. The return on these investments is over 16 per cent
which requires high risk and leverage (Blomkvist A., 2005).
Renting investors are interested in financial stability and long-term income with low risk
or full management and maintenance of the properties. The type of contract in this case is
renting or lease-back contract. These investors require the property which is strategically
valuable for the seller and the seller is ready to sign long-term lease contract ranging 10-
25 years (Blomkvist A., 2005).
“Institutional investors have large amounts to invest. They appear as investment
companies, mutual funds, brokerages, insurance companies, pension funds, investment
banks and endowment funds. Institutional investors are covered by fewer protective
regulations because it is assumed that they are more knowledgeable and better to protect
themselves. They account for a majority of overall investment volume”(Anop S.,
Kharlamova D., 2007).
3.2 Property as an investment asset
Before talking about property as an asset investment, it would be interesting to see how
real estate assets or properties are priced. On the supply side of the property market there
are property owners who want to sell or reduce the holdings of real estate assets. On the
demand side there are other investors who want to buy or increase the holdings or real
estate assets. According to Geltner “The balance between supply and demand determines
the overall level of real estate asset values relative to other forms of physical capital in
the country. Within this overall general valuation context, the specific values of
individual properties or buildings are determined by the perceptions of potential investors
regarding the level and riskiness of the cash flows that each individual property can
generate in the future”(Geltner et. al., 2007: pp.14). Properties (for example, individual
properties and buildings) vary in size and magnitude.
In general, property prices and values are usually taken in terms of property value per
dollar of current net rent or income (Geltner D., Miller N., Clayton J., Eischholtz P.,
2007). In this way it is easier to compare the prices of different properties. In commercial
markets the inverse of the price/earnings multiple is used for the description of the
property values and prices. The measure is called capitalisation rate, cap rate, which is
the property operating earnings (operating income for the owner) divided by the property
asset value or price. Capitalisation rate and current yield are similar. Current yield is the
amount of current income which is received by investor per dollar of current value of the
investment (Geltner D., Miller N., Clayton J., Eischholtz P., 2007). So, the property value
equals to earnings divided by the capitalisation rate.
Knowing how the properties are priced, it would be interesting to look at property as an
asset in single assets or multi/mixed assets portfolios. Investors allocate their capital in
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