SafeASSET

The Roles, Functions and Characteristics of ASSET MANAGEMENT

Safe ASSET Management — Mon, 14 Jun 2010 20:11:24 GMT

You need only develop an awareness and understanding of Asset Management based on the following summarised coverage :
* The role of Asset Management, as a specialist separate professional discipline, mainly operates within the top-end investment environment in the property industry (i.e. Institutional Investors,
Funds and Trust management, Property Syndicates, etc). The Asset Management role is not usually present as a separate function in the property management environment associated with smaller-scale commercial buildings or simpler, lower-grade investment environments. In such smaller-scale, lower-grade investment environments, the Property Manager usually merely incorporates the ‘asset management’ role into his / her normal range of duties.
* In a general sense, where a separate AM role does exist, then the title of Asset Manager denotes a role which is indisputably regarded as being ABOVE THAT of the ‘mainstream’ Commercial Property Manager.
* Therefore, the role of Asset Manager is placed ABOVE the role of Property Manager on the Management Hierarchy Table.
* The Asset Manager’s role is more STRATEGIC in nature – as opposed to the mainstream ‘traditional’ role of the Property Manager, which is more TACTICAL in nature.
* The purpose of Asset Management is to design appropriate longer term investment strategies and make decisions relating to them, usually for a large group, or portfolio, of multiple property assets held by the one owner - with the goal of not only preserving investment value, but also ADDING VALUE wherever possible. In other words, the underlying objective revolves around maximizing the desired return and capital growth from each of the investment assets in the portfolio, throughout their life cycles and holding periods.
* Asset Management thus involves key higher-echelon investment analysis and risk management roles such as life-cycle costing, forward-looking income projections, major capital expenditure and plant / equipment replacement programs, forward-planned property refurbishment schemes, property-asset acquisition and disposal strategies, the desired positioning of a property asset in its relevant market, forward-looking market research, tenancy analysis and tenantretention programs, and analysis of property-cycle and market dynamics on a medium-term future time horizon. The TIMING decisions as to major activities such as plant replacement, refurbishments, acquisitions, and disposals, are crucial to the Asset Management role.
* In the process of designing investment strategies, the Property Manager is invariably involved in close liaisons with the Asset Manager, in a significant advisory & consultancy capacity. Where a separate Asset Management role exists in terms of an internal company structure or where an outsourced relationship basis exists between two separate management companies, it is primarily the Property Manager’s role to implement the strategies and decisions made by the higher-echelon Asset Manager.
* In this sense, then, the Asset Manager is therefore held to be the Property Manager’s ‘boss’.
* Many Institutional Investors (i.e. listed & unlisted property trusts, diversified investment funds, superannuation funds etc) employ Asset Managers on an in-house basis. The lower-echelon Property Management role can either be also handled on an in-house basis, or it can be separately outsourced to a major agency-based real estate firm. In this sense, the Institutional in-house role IS NOT an agency role in any legal sense (because the Institutional Investor adopts a self-management asset function for the assets so owned).
* In Institutional Investor environments, the Asset Manager bridges the gap between the Property Manager and the Portfolio / Funds Manager.
* Overlaps in roles and duties can frequently occur between the positions of Asset Manager and Commercial Property Manager. For instance, often, in non-Institutional Investor environments, a separate formal position of Asset Manager will not apply, and will be entirely ABSENT from the management organisational structure. In such cases (particularly in ‘pure’ real estate AGENCY company environments), the Property Manager assumes many of the roles and duties which would otherwise normally be associated with an Asset Manager.
* This syndrome of role overlaps (plus a natural, entirely understandable ego-driven desire for greater industry-recognition and business / corporate identity & ‘image’ on the part of lower-echelon property managers or the firms who employ them) has given rise, on occasion, to considerable confusion and uncertainty in some of the ‘hybrid’ job-titles which some companies and individuals have adopted for themselves. For example, many firms and individuals who are actually nothing more than ‘pure’ ‘orthodox’ ‘mainstream’ Property Managers, have taken to calling themselves Property Asset Managers, in an attempt to elevate their ‘image’ and status amongst the property industry. Such practices, while understandable from a certain business / corporate perspective, also regrettably sometimes lead to unnecessary and needless confusion within the industry.

The Management Hierarchy Table

Safe ASSET Management — Mon, 14 Jun 2010 20:10:26 GMT

When we refer to the ‘Management Hierarchy Table’, we’re merely talking about a very simple version of an organisational flowchart. The various professional management disciplines in the property industry tend to operate and inter-relate with one another in a well-defined ‘pecking order’ - with Funds Management at the top of the ‘tree’, and Facilities Management at the bottom.
The most commonly accepted hierarchy of capital investment management functions within the commercial property industry is depicted in a very simple top-to-bottom ‘table’, as follows :

Funds Management
Portfolio Management
Asset Management
‘Mainstream’ Commercial Property Management
Facilities Management

This hierarchy table represents the stock-standard industry ‘pecking order’, and it constitutes the version which the majority of long-established participants within the Funds and Property Management sectors (particularly those within the major CBD real-estate-agency firms) most readily recognise, accept and acknowledge. A number of newer-fledged competing firms who entered the property industry during the 1990’s as previously-unheard-of new-comers (some with prior nonproperty backgrounds), now competing against the traditional property-agency companies for their own market share in the managed-investments sector in a high-pressure competitive business environment, would for their own purposes and vested-interests might well tend to dispute the positioning of several of the roles depicted above.
Some such firms, for instance, might well tend to disagree with the positioning of Facilities Management on the table - they might, perhaps, be more inclined (for reasons of business generation, internal company politics, self-promotion and personal or ‘corporate’ ego) to put their own ‘version’ of the FM services they offer, much higher-up on the table. Similarly, depending on the particular Institutional Investment firm and the nature of their own internal organizational structure, it will sometimes be the case that the ‘job titles’ of portfolio manager
and asset manager may well be reversed in order of priority.

The Evolution of Asset Management and Facilities Management in Australia Since the Mid 1980’s

Safe ASSET Management — Mon, 14 Jun 2010 20:04:22 GMT

Since about the mid 1980’s, the capital-investment management domain in the commercial property industry in Australia has undergone an era of rapid change and evolution. It has really only been since the early 1990’s, however, that higher levels of sophistication in operational standards and practices have been developed.
This development of more advanced, sophisticated ways of managing large investment holdings has given rise to the present-day prominence of Asset Management and Facilities Management within the top-end sectors of the property industry.
The growth in activity-levels of investment management has been massive – so much so, that the ‘Managed Investment Funds’ sector (which is one major part of what is commonly known as the Institutional Investment sector) is nowadays virtually an entire industry within itself, acting as probably the single most dominant driving force in commercial property-market dynamics, and providing a property-services employment base for thousands of professional practitioners in each State in Australia (including, of course, property, asset and facilities managers).
Many complex factors have played key contributing roles in this process of rapid change and growth. These factors are also largely responsible for the organisational structure of the Managed Funds Industry as it exists today, and the prominent industry positions occupied by the professional disciplines of Asset Management and Facilities Management. But in particular, three elements stand out as major contributing factors since about 1985. These are :
• the de-regulation of Australia’s financial markets in the mid 1980’s.
• the Great Property Crash of 1990-93.
• The Information Technology revolution of the 1990’s.
For Example - In the view of many expert property-industry commentators, observers, and practitioners, the current-day presence, prominence and industrypositioning of the professional disciplines of Asset Management and Facilities Management can be traced back directly and significantly to the early 1990’s, and the aftermath and fall-out from the Great Property Crash of 1990-93. Commencing in about early 1993, a series of articles began to appear in the industry literature, which saw the first reasoned Post-Crash discussions of the modern era, in respect to the desirability of incorporating more advanced investment analysis, performance-monitoring, and RISK ASSESSMENT techniques, into the management processes applied to large portfolios of capital investments. These techniques constitute the same ones which are today associated with Asset Management and Facilities Management.
While the specialist professional disciplines of Asset Management and Facilities Management had ‘vaguely’ been in existence within the Australian commercial property industry since about the early 1980’s, it took the Great Property Crash of 1990-93 to bring about an enhanced awareness of their usefulness and importance in the future working environment of the ‘top-end’ Institutional and Managed Funds sectors of the industry.
Let’s demonstrate what we mean here, by reference to two examples from the literature (many more are available, in fact, from this same historical time-period). A good description of the range of sensible, astute, forward-looking financial and investment analysis functions which nowadays constitute the professional discipline of Asset Management. Note also the descriptions which Dr. Seek provides in respect to the dismal prevailing market conditions, as they existed at the time of writing. Principally, the chief problem in commercial market dynamics at the time related to a massive OVER-SUPPLY of newly-completed, speculative development projects, which had invariably been commenced far too late in the late 1980’s cyclic Property Boom several years beforehand, and without an adequate and sufficiently responsible depth of market research prior to embarking upon development activity.
In a similar vein, the advent of the so-called Information Technology ‘revolution’
- i.e. the modern era since the mid 1980’s - has also assisted and facilitated the evolution of more progressively more complex and sophisticated Financial, Investment and Property-Performance analysis techniques (the use & application of which was previously not widespread in Australian commercial property environments, even as recently as the start of the 1990’s). The employment of advanced financial and investment-analysis techniques nowadays constitutes standard industry practice within the Asset Management, Commercial Property Management, and Facilities Management arenas. Sophisticated, leading-edge computer software programs, computer modelling systems, and virtual-reality processes now permit building-systems-monitoring and forward-looking financial analysis on a widespread scale within the managed-investments sector of the property industry.

Facilities Management and Asset Management, and Their Relationship to ‘Mainstream’ Property Management

Safe ASSET Management — Mon, 14 Jun 2010 20:01:12 GMT

What we refer to as ‘mainstream’ Property Management constitutes only one of a series of possible types of capital-investment-management functions which exist in the modern-day world of the commercial property industry. Quite separately to mainstream Property Management, Asset Management and Facilities Management have evolved to form part of a wider scope of specialisation and diversification which is nowadays present within the commercial property industry, when it comes to the various types of capital-investment ‘management’ roles which are conducted.
In property management and property investment terms, a commercial building is essentially comprised of two (2) fundamental and indisputable elements:
* it is an investment (i.e. a financial) asset.
* it is also an operational (i.e. a physical) asset.
In the most fundamental sense, it can be said that Asset Management is a function connected more to the financial management of the commercial property-investment asset. Facilities Management, on the other hand, is a function connected more to the operational / physical management of the commercial property-investment asset.
As a result of the growth in the magnitude of property-investment activity at the top-end level (for example, within the Institutional sector, in all kinds of indirect and direct managed funds & trusts, superannuation funds, and in large syndicated investment holdings) and also in the sheer volume of large, complex commercial investment buildings under management in the modern era, the ‘upper’ end of the traditional Property Management function (i.e. the financial and ‘investment management’ range of duties) has been split off in many cases, and has been given a separate, more specialised job title of ‘Asset Management’.
Likewise, the ‘lower’ end of the traditional Property Management function (i.e. the ‘physical operational’ building-management range of duties) has been split off and been given a separate, more specialised job title of ‘Facilities Management’, which tends to be applied in several kinds of different ‘guises’ or possible scenarios.
Within the commercial property industry, there exists a significant degree of confusion and obscurity when it comes to the interpretation and exact meaning given to the roles of Asset Management and Facilities Management. In the case of Facilities Management, in particular, that term can mean many different things to many different players within the industry, depending on where they’re coming from and the environment in which they operate. For example, the traditional investor, the institutional-grade investment base, the major tenant, or even owneroccupiers, each sometimes tend to have their own peculiar interpretation of the term ‘Facilities Management’.
Moreover, there are various providers of property services within the property industry who all label their services under the single banner of ‘Facilities Management’ - but, different service-providers often possess entirely different interpretations and perceptions of what this FM term actually means.
To help avoid needless confusion on your part as property students, however, you can simply equate the term ‘Asset Management’ with ‘Investment Management’ functions which are derived from the ‘upper-echelon’ end of the traditional Property Management duties-base. Likewise, you should equate the term ‘Facilities Management’ with lower-order ‘Physical Building Operations’ management - derived from the ‘lower-echelon’ end of the traditional Property Management duties-base. This will help to eliminate much of the obscurity and uncertainty surrounding these AM and FM terms which presently exists within the industry.
The specialised and diversified investment management functions which are inherent in Asset Management and Facilities Management mainly apply in the top end of the commercial property-investment and building-management spectrum only. In other words, they mainly come into play in cases of large, complex, high-quality property investment classes - i.e. the type of property assets commonly held within entire portfolios by big Institutional Investors such as managed funds, trusts, superannuation funds and syndicates. What we’re talking about here are examples such as modern high-rise office buildings, bigger, more recently developed industrial estates, and multiple-occupancy shopping centres.
In contrast, the smaller, simpler commercial investment classes of property, typically held by smaller-scale investors, usually do not attract nor require the more in-depth types of dedicated, specialised property services which are provided by separate Asset Management and Facilities Management functions. In these kinds of simpler, lower-echelon investment environments, the Property Manager simply maintains the old traditional ‘one-stop-shop’ role, incorporating into his / her range of duties whatever equivalent asset and facilities management functions might be required.
Within the top-end Institutional Investor and Managed Funds sectors, the range of management functions are multi-dimensional in nature - extending from ‘top-ofthe-tree’ Funds and Trust Management, which is very ‘macro’, ‘big-picture’ and forward-looking in its character (and which often spans ALL 3 capital markets - i.e. the property, share and money markets), through to ‘mid-level’ dedicated property Portfolio and Asset management functions, which are strategically oriented (i.e. oriented to medium-term time horizons and property-investment holding periods), and then down to ‘lower-echelon’ Property Management and
Facilities Management functions, which are more ‘micro-cosmic’ and ‘tactical’ in their character, dealing with the implementation of investment objectives, property operational performance or tenant requirements on a more day-to-day, shorter-term time horizon.
The broad range of capital investment management functions in the industry can be visually depicted by way of a well-defined hierarchy of roles. The roles of Facilities Management and Asset Management lie within this hierarchy, on either side of the mainstream Property Management function (in summary, Facilities Management sits below Property Management on the hierarchy table, whilst Asset Management sits above Property Management).
In terms of their nature, the roles of Facilities Management and Asset Management are closely allied to the ‘mainstream’ Property Management function, since they are basically only ‘off-shoots’ of the traditional wider PM role anyway.
Yet, these FM and AM industry roles in many cases have also grown and evolved in their own right as specialised disciplines since the early 1990’s, to the extent that they nowadays often possess significant characteristics which also differentiate their fundamental nature from that of traditional, orthodox Property Management.
This is not to say that the distinctions between the three hierarchical functions (Asset Management, mainstream Property Management, and Facilities Management) are always necessarily cleanly separated nor clear-cut. In practice, there are often significant ‘grey areas’ and overlaps that exist, and very indistinct boundary lines are often drawn between the three professional disciplines.
In many traditional property-agency workplace environments, for example, the mainstream property manager will sometimes (perhaps even often) be called upon to carry out a wide range of duties under the name of the ‘generic’ Property Management job-title, some of which span across all three disciplines. In such cases, the separate job titles and roles of Asset Manager and Facilities Manager WILL NOT be created at all. In other words, the managing agent will frequently be required to conduct activities in the conduct of his / her duties which would otherwise be associated with the roles of Asset Management and Facilities Management (e.g. in ‘simple’ categories of investment buildings, as already alluded to, or in cases where only small investment portfolios are held by ownerclients).
Conversely, in other, modern-day real estate agency work environments, especially where large portfolios are managed for the one single client, the role of Facilities Manager, in particular, will frequently be deliberately separated off, and outsourced by the agency firm, and allocated (often in collaborative joint-venture schemes) to completely separate, smaller, more specialist business entities. This type of scenario NEED NOT be confined merely to the Institutional Investor
(Managed Funds) category - it can also apply, for example, to syndicates of investors, or to any other scenario which suits the particular needs of the investor.
In some Institutional Investment and Managed Funds work environments, where the ownership base actually self-manages its own property investment portfolio on an entirely in-house basis, the Facilities Management and Asset Management job positions may well operate on a fully internal basis, within the single organisational structure of the company running the Property Portfolio or Managed Fund. In such cases, no formal agency relationship exists - because the property management team is merely employed on the payroll of the company or organisation who also owns the investment portfolio.
In addition, the 1990’s has seen the entry into the Funds and Property Management industries of a series of competitors from non-property backgrounds, whose objective is to ‘steal’ away a business / market share in Asset Management, Property Management and Facilities Management services (either singularly or in all three domains) from the traditional long-established major agency firms who have always, formerly and historically, provided the mainstay of commercial, financial, and property-investment management services to investors.
In this context, a number of the newer, non-agency business organisations from non-property backgrounds, for example, (referred to above) have also labelled and promoted their varied package of Corporate Real Estate property services (targeting major corporate tenants and owner-occupiers as their clients, and NOT necessarily investors) under the single banner of ‘Facilities Management’, when in reality what they really trying to offer may well comprise a mixture of all three management services (i.e. asset, property and facilities) - much to the confusion of potential clients, consumers, other property industry practitioners, and property students.
Accordingly, the chief learning objectives in Week 9 of this subject are :
(i) to try to eliminate some of the confusion, and to enable you to understand where Facilities Management, ‘mainstream’ Property Management, and Asset Management all fit in on the Hierarchy of Management Table, and how they relate to one another in the most commonly-accepted industry interpretation.
(ii) To enable you to appreciate and understand the nature of Facilities Management and Asset Management, in their capacities as separate career paths and separate sub-functions within the overall spectrum of capitalinvestment ‘management’ activities.>

Listed Property Trusts / A-REITs

Safe ASSET Management — Sun, 15 Nov 2009 10:24:58 GMT

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Westfield Group > >
Associated Entities	Westfield Holdings Limited: Westfield America Management Limited: Westfield Management Limited
Postal Address	GPO Box 4004 Sydney NSW 2001
Street Address	Level 24, Westfield Tower, 100 William Street East Sydney NSW 2011
Phone	(02) 9358 7877
Fax	(02) 9358 7881
Toll Free	1800 222 242
Email	investor@westfield.com.au
URL	http://Westfield.com/corporate
Corporate Background	The Westfield group (ASX code: WDC) is an internally managed, vertically integrated, shopping center group undertaking ownership, development, design, construction, funds/asset management, property management, leasing and marketing activities and employing approximately 4,000 staff worldwide. It has investment interest in 119 shopping centers across Australia, the united States, the United Kingdom and New Zealand, encompassing in excess of 23,000 retail outlets. With a total value of assets under management in excess of A$69Billion, the Westfield group is the largest retail property group in the world by equity market capitalization.
Key Property Executives	Peter Allen (CFO), Domenic Panaccio (Deputy CFO), Christine Godfrey (GM Investor Relations)

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Colonial First State Global Asset Management (Group Ranking) > >
Associated Entities	Colonial First State Property Ltd (CPSMPL): Commonwealth Investment Management Ltd (CMIL): CFS Managed Property Limited: PPS Nominees Pty Limited Commonwealth Bank Officer Superannuation Corporation Pty Ltd
Postal Address	GPO Box 3892 Sydney NSW 2001
Street Address	Level 7, 52 Martin Street Sydney NSW 2001
Phone	(02) 9303 3500
Fax	(02) 9303 3622
Toll Free
Email	adefrancesco@colonialfirststate.com.au
URL	http://cfsgam.com.au
Corporate Background	Colonial First State Global Asset Management is the consolidated asset management division of the commonwealth bank of Australia group, one of the largest financial institutions in Australia. Colonial first state global asset management is Australia’s largest manager of Australian sourced funds, employing more than 200 investment professionals located in Sydney, London, Edinburgh, Singapore Hong Kong, New York, Auckland and Jakarta. Colonial First State Global Asset Management manages more than $127 Billion (as at 31 March 2009) across a diverse range of asset classes including Australian and global shares, short term investment, global fixed interest and credit, property securities, direct property, global resources, unlisted infrastructure and listed infrastructure securities. Colonial first state global asset management offers tailored investment solutions for retail, wholesale and institutional investors and applies an active discipline approach to managing those investments.
Key Property Executives	Darren Steinberg (Head of Property), Chris Gudgen (KIPT), Angus McNaughton (Strategy & wholesale funds), Michael Gorman (CFX), Charles Moore (CPA), Anthony DeFrancesco (research), Wal Egdell (Principal Officer), Tony Gilchrist (Development), David Marcum (Operations)

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DEXUS Funds Management Limited >
Associated Entities
Postal Address	PO BOX R1822 Royal Exchange NSW 1225
Street Address	Level 9, 343 George Street Sydney NSW 2000
Phone	(02) 9071 1100
Fax	(02) 9071 1101
Toll Free
Email	feedback@dexus.com
URL	http://dexus.com
Corporate Background	DEXUS is one of the largest diversified property groups in Australia, with over $15B or 250 properties under management. The group is experienced in owning, managing and developing high-quality office, industrial and retail properties in Australia, New Zealand, United States, Canada, German and France. The group has two areas of operation: approximately $9B direct property portfolio, DEXUS property Group, which is focused on developing, owning and managing high-quality office and industrial assets in Australia, New Zealand, North America and Europe, and approximately $6B funds management business that develops and manages office, industrial and retail properties on behalf of third party investors. This includes DEXUS wholesale property fund, two blue-chip private client mandates and three property syndicates, which collectively make one of the biggest third party fund management businesses in Australia.
Key Property Executives

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ING Management Limited (Group Ranking) >
Associated Entities	ING Group: ING Real Estate Investment Management Australia: Armh2 Jones Management Limited: Armh2 Jones Management Ltd
Postal Address
Street Address	Level6, 345 George Street Sydney NSW 2000
Phone	(02) 9033 1000
Fax	(02) 9033 1060
Toll Free	1300 653 497
Email	realestate@ingrealestate.com.au
URL	http://ingrealestate.com.au
Corporate Background	ING Real Estate Australia manages seven property funds on behalf of over 55,000 investors. In Australia, ING real-estate includes funds management, property and asset management, finance and development. Operations span global real estate markets and encompass office, industrial, retail, senior housing, entertainment and healthcare property sectors. ING Real Estate Australia is part of ING Real-Estate, an integrated real estate group that in engaged in the development, financing and investment management of quality real estate in all major global markets.
Key Property Executives	Hugh Thomas (CEO), Paul Toussaint (CEO0IIF), Tino Tanfara (CEO-IOF), Victor Breuer )CEO-ILF), Daniel Hargraves (CEO-IEF), Anthony Bertoldi (CEO-INGPFA), Miles Wentworth (CEO-IHF)

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Significance of infrastructure

Safe ASSET Management — Sat, 14 Nov 2009 00:20:52 GMT

With the emergence of infrastructure as a new asset class it has also been found to have influenced the allocation of funds to property, but only marginally. Private investment in infrastructure has also been found to be very positive as it has allowed government to reduce their responsibilities and the costs associated in there provision and maintenance.
The capital injection from the private sector will also increase the accessibility and geographical makeup of property markets. This increased investment will continue to improve the social and economic infrastructure standards of the developed and developing world.
Therefore, growth in infrastructure is set to continue as the private sector and government identify the unique benefits and opportunities that this asset class provides. Furthermore, international investment will continue to increase in importance as the availability to find quality domestic assets becomes more competitive.>

Asset Allocation

Safe ASSET Management — Sun, 01 Nov 2009 12:53:50 GMT

Asset allocation is the process of determining the most portion of financial resources available to institutional investors or corporate fund managers *eg: AMP, Deutche, Macquarie, BT, ING, Colonial) that is to be invested in specific asset classes such as shares, bonds, cash and property.
The major specific asset classes available include:
Shares
Bonds
Cash
property (either direct investment or indirect investment)
Both at a national and international level, given the globalization of investment opportunities and deregulation of the financial sector in recent years. other investments re also available, but are certainly not as substantive as the above major asset classes.
Some asset allocation examples would be useful here. At December 2005, the average asset allocation of balanced funds in Australia was:
Australian shares: 37.4%
International share: 27.4%
Listed property: 7.6%
Australian bonds: 13.9%
Overseas bonds: 5.8%
Cash: 5.3%
Other: 2.6%

The asset allocation process is dynamic, for example in December 2002, the equivalent asset allocation was Australian shares (38.3%), international shares (26.6%), listed property (7.8%), Australia bonds (15.1%), international bonds (5.2%) and cash (4.3%).
At June 2004, the average asset allocation for superannuation balanced funds in Australia was:
Australian shares: 33.0%
International share: 21.1%
Listed property: 2.6%
Unlisted property: 3.8%
Australian bonds: 14.5%
Overseas bonds: 5.6%
Cash: 6.9%
Other: 12.5%

This process of asset allocation to specific asset classes (eg: shares, bonds, cash, property) is very important, as studies have shown that up to 80% of investment results and performance are directly attributable to asset allocations, as opposed to specific stock selection (eg. NAB, or Westpac).
The importance of asset allocation is amply demonstrated with major “events” such as the October 1987 stock market crash, the dot.com collapse in 2000-01 and the downturn in the commercial property market in the early 1990s.
The stock market quote:
“bulls can make money, bears can make money, but the greedy pigs miss out”
Clearly highlights this asset allocation issue.
Why is asset allocation important? Clearly no one asset is the best performed asset every year. This is perfectly shown by analyzing asset class performance in Australia over 1985 – 2005 from the PCA. In particular:
Best performed asset class:
Shares (43% of years), bonds (10%), property (14%), LPTs (33%)
Worst performed asset class:
Shares (24% of years), bonds (29%), property (33%), LPTs (14%)
Similarly, within the property sector:
Best performed property sector:
Office (19% of years), retails (33%), industrial (48%)
Worst performed property sector:
Office (67% of years), retail (14%), industrial (19%)
So the key investment issue is selecting appropriate asset class weights for the investment portfolio and then drilling down into specific stock selection.
The following diagram illustrated the general approach to designing an investment portfolio; particularly highlighting the importance of a strategic top-down investment approach. This is more important at an asset allocation level than using a bottom-up approach.
How to design a portfolio

MACQUARIE Group Limited >
Associated Entities	Macquarie Country Wide Management Ltd; Macquarie Leisure Management Ltd; Macquarie Office Management Ltd; Macquarie Investment Management Ltd; Macquarie Asset Services Ltd
Postal Address	GPO Box 4294 Sydney NSW 1164
Street Address	1 Marting Place Sydney NSW 2000
Phone	(02) 8232 6635
Fax	(02) 8232 6510
Toll Free	reits@macquarie.com.au
Email	http://macquarie.com.au/reits
URL	The ASX listed Macquarie Group Limited (MQG) has more than $243 billion in funds under management across a broad range of assets. Macquarie has real estate businesses located in Australia, Africa, Asia, north America, and Europe and offers a range of real-estate services including: Listed and unlisted real estate fund and asset management globally Corporate advisory, M & M, capital raising for real estate companies globally Principal real estate investing Real-estate development businesses Project financing Business partnerships Securitized real-estate equity and debt fund management
Corporate Background	Stephen Girdis, Simon Jones, Mathew Banks
Key Property Executives

Assembling the profile Risk \| Tax \| Timeframe
Strategic asset allocation Shares \| property \| Bonds \| Cash
Analyzing and forecasting
Tactical asset allocation
Shares Diversification	property Diversification	Bonds Diversification	Cash Diversification
Asset and vehicle selection

The following examples highlight the strategic role of asset allocation and the different level of assets held by institutional investors depending upon their strategic objectives:

Growth Plus	Balanced Growth	Conservative Growth	Cash Growth
Invest solely in local and international shares and property. These are growth investments that we expect to earn higher returns over the long term.	Invest mainly n shares and property, which are expected to earn higher returns over the long term. Invest the balance in more stable assets like fixed interest securities and cash.	Invest mainly in fixed interest securities and cash, which are expected to deliver stable returns over the long term, invest the balance in shares and property.	Invest in cash and short-term money markets securities. Invest only in low-risk securities by financial institutions.
Local Shares 50% International shares 30% property 20%	Local Shares 35% Indexed Bonds 5% Cash 5% property 15% Fixed Interest 20% International Shares 20%	Fixed interest 10% Indexed bonds 5% property 10% Overseas shares 10% Local shares 10% Cash 25%	Cash 100%

The performance of these asset-specific options is measured against recognized investment benchmarks. Our aim is to outperform those benchmarks in each asset class over rolling one to three year periods.

Beta Asset Management

Safe ASSET Management — Sat, 24 Oct 2009 11:57:34 GMT

You have previously calculated risk as the standard deviation of the asset returns; particularly focusing on property being low risk. In calculating this measure of risk, it is absolute measure of risk; eg:8.32%

Another way to look at risk is to calculate a relative measure of risk; relative to overall “market” risk (eg: stock market risk); this is referred to as beta, which can be calculated for each asset.

We will go through the calculation for beta shortly; it is based on the capital Asset Pricing Model (CAPM):
R=Rf+B(Rm-Rf)
Where:
R = asset return
Rf = risk free rate
Rm = market return
B = beta
In interpreting beta:

Beta approximately 1.0; indicates asset has similar volatility to the overall market
Beta greater than 1.0; indicates asset has more volatility than the overall market; eg: beta = 1.20 implies asset is 20% more volatile than the overall market;
Beta less than 1.0; indicates asset has less volatility than the overall market; eg: beta = 0.70 implies asset is 30% less volatile than the overall market.

in calculating an asset’s beta, care needs to be taken in defining the overall market; for example, for LPTs, the overall market is the stock market as LPTs are listed on the stock market. However, for retail property, the overall market is the overall Australian property market.

Risk management in asset investment

Safe ASSET Management — Sat, 12 Sep 2009 05:35:13 GMT

The concept of “risk management” or “reduced risk exposure” is fundamental to asset allocation. What is risk? A number of general definitions are available such as “the uncertainty regarding the expected rate of return from an investment”. Specific types of risk are also calculated by superannuation fund managers (eg. downside risk). Risk is often included in investment advertising, as it is an important element in investing.
Some risks are clearly visible. Others hide from sight.
The unexpected is the one thing you can always expect.
Suppose that overseas political upheaval thins out the flow of a raw material that you can’t do without or significantly changes the level of interest rate and exchange rate?
Life can’t be risk free and leadership isn’t built on sure things.
given the importance of investment risk, we will spend a lot of time in subsequent sections of this article discussing and assessing investment risk. In particular we will examine the issue of shares being “high risk” and property (real estate) being “low risk”.
A fundamental concept is that investors should clearly follow the “golden rule” of investment and develop a diversified investment portfolio to reduce risk exposure or expressed more simply, don’t put all your eggs in one basket.
On the next article we will discuss diversified investment portfolios and risk.

Glossary of Asset Investment Terms

Safe ASSET Management — Sat, 29 Aug 2009 05:12:41 GMT

Accrual accounting - Revenue and expenses are recorded as they are earned, regardless of whether cash has been paid or received.
Acquisition cost – costs of acquiring an asset which includes the purchase price plus other costs required to ready the asset for use including stamp duty payable and any other expenses incurred by the purchaser (eg. Due diligence costs).
AFV – assessed fair value is the net present value of 5 years cash flow discontinued to establish PIR’s fair value.
Alpha – value added from active management over passive investing.
Amortization Period – the period of time a loan is calculated over (and repaid).
Ancillary tenant – a tenant not core to operations, for example that rents a space on a building’s roof one or upper level for signage or communications.
ASIC – the Australian securities and investment commission. ASIC enforces and regulates company and financial services laws to protect consumers, investors and creditors.
Ask – the lowest price at which a market participant is whilling to sell their securities for.
ASX - Australian stock exchange.
Basic Points - one basis points in 1/100th of 1 percent is equal to 100 basis points. Generally used to define differences in yield.
BBSY (Bank Bill Swap Bid Rate) – a benchmar intrest rate quoted by routers information service. The BBSY is typically used by financial institutions involved in intrest rate swap and related transactions.
Bear Market – a prolonged period of falling security prices.
Benchmark – a standard by which something can be measured or judged. Often used as a synonym for index.
Beta – a measure of assets sensitivity to an underlying index or factor. For example an asset with beta of 1.2 would be expected to return 12 percent if the market returned 10 percent and 12 percent in the market returned 10 percent. Beta is computed as an assets correlation with the index times the ration of the assets standard deviation to the indexes standard deviation.
Bid – the highest price offered to purchase securities in a market.
Bond –An IOU (debt security) issued by a government of corporation that pays a stated rate of interest and return the dace value on the maturity date.
Book Value – the value of an asset as recorded in a company’s books. Representing its cost plus any additions, less depreciation. The book value is often different from the current market value.
Bottom up approach - an investment strategy that emphasizes finding individual companies which are expected to outperform the index return before considering broad economic trends.
BSX – Bendigo stock exchange.
Bulky goods – a retail warehouse type operation such as a large hardware, furniture or white goods store. Generally a standalone unit normally selling bulky brown or white goods to the public.
Bull market – a prolonged period of rising security prices.
Business Park – a building that provides a mix of offices and light industrial premises not normally located in the core CBD of a city.
Capitalization rate – used by valuer as a means of determining market value of a property. Using this method market value will normally be net income from the property divided by the cap rate.
Cash rate – term defined by the reserve bank of Australia (RBA) as the interest rate which banks pay or charge to borrow funds from or lend to other banks on an overnight secured basis. Also known as the interbank overnight rate. The RBA calculates and publishes this cash rate of each day on the basis of data collected directly from the banks. Also to mean the interest rate which financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis?
Cash rate target – a target for the cash rate or overnight rate. Specific by the reserve bank of Australia, it is a tool in monetary policy.
Central business district (CBD) – the major commercial area of a city normally providing offices retail malls arcades and strip shops with central post office and central public transportation hub.
Commercial property – investment property intended for use by all types of retail and wholesale stores office buildings industrial hotels and service establishments. May also refer specifically to office property.
Community center – a shopping center containing a minimum of one disount department store or two supermarkets.
Convexity – in a fixed income security, convexity measures the way duration and price change when interest rates change.
Cum-distribution - entitlement to distribution. Securities are said to trade cumdistribution in the time period in between declerations of the divided and the last day to register for the dividend after which the securities become “ex dividend”. Securities bought in the cum-disitribution (which is the next distribution to be paid) with the price of the securities usually reflecting the amount of the distribution on a time adjusted basis. Securities sold during the cum distribution do not entitle the previous owner to receive the last distribution to the sale.
Depreciation – a method of allocating the cost of a physical asset over its useful life, which represents a loss or write-off in the value of an asset. Caused by deterioration obsolescence, or both. There are levels of depreciation levels when applied can pass on tax advantages to unit holders in the form of tax-advantaged income distributions, set against other related income.
Derivative security – a security such as an option or futures contract whose value is derived from the value of the underlying asset.
Discounted cash flow method (DCF) – a valuation method that for difference in the timing of cash flow, by discounting these cash flows to their present values. The principle is that one dolor today is more valuable than one dolor tomorrow.
Distribution – income emanating from a trust, similar to a dividend from a company.
Distribution reinvestment – a trust may offer its unit holders a DRP facility whereby they can purchase more trust units in lieu of their cash distribution entitlement.
Dividend – represents the income to shareholders of a company. Many of the stapled securities that are a part of the LPT sector pay a dividend for the corporate component and a distribution for the trust component.
DPU – distribution per unit.
DPS - Distribution per security
DRP – distribution reinvestment plan.
Effective rent – rental payment less concessions or inventive offered by the landlord.
Equivalent yield – the income return on the property. If the property has been purchased then this is net of any acquisition costs or impending rent reviews. It is a weighted average of the initial yield and reversionary yield and represents the return a property will produce based upon the timing of the income received. Usual proactive for equivalent yields is to assume rent received annually in arrears and on gross values including prospective purchaser’s costs.
Ex-distribution – the time period on which the buyer of a security is not entitled to an already declared distribution. An investor buying an LPT on the dividend date or afterwards, will not receive the recently declared dividend with the seller retaining the dividend.
Franking credit – used in a dividend imputation system and represent the portion of a dividend to which a company has already paid taxation. Shareholders then include the grossed up amount of the dividend (pre tax) and then have their income tax payable calculated using that grossed up dividend. Franking credits are then used to offset tax payable.
Freehold (or an estate in fee simple) –the highest form of private real estate ownership (although subject to eminent domain) and is for an unlimited duration. An owner can use the land (and improvements attached to the land which to all intents and purposes become part of the land) in any way subject to the usual environmental building zoning use mining and other controls established by local state or federal government.
Funds of funds (property securities fund) – funds which invests in other funds in the same fund family, instead of or in addition to investing directly in equity, fixed income or other types of investments.
Future contracts – a contract that has uniform terms concerning price, quantity and expiration and that obligates the seller to pay the value of the contract to the buyer at a pre-specified date.
GDP (gross domestic product) – is the total value of all goods and services produced within a country in a given time period (usually a calendar year).
Gearing – there are many variation of this ration. PIR calculates it as total interest bearing liabilities divided by the total assets of the LPT. Where possible total interest bearing liabilities and total assets of enteritis owned by the LPT are included, as opposed to the net assets of these entities.
GLA Gross lettable area – is the measure of the total building area of retail and industrial properties.
Ground lease – this is a lease that gives the right of use and occupancy without ownership of land, normally allowing for improvements (such as buildings or fixtures) to be placed in the land,, paid for and provided by the tenant.
Hedge – a strategy used to offset investment risk. In investing, hedging involves the purchase of an offsetting position, such as a put option or futures contract, to guard against the risk of a market decline. Often used as a defensive strategy in portfolios investing in non-domestic securities to reduce negative effects of unfavorable moves in currency exchange rates.
Historical yield – the yield on an investment based on the end of period price, but using distributions or dividends previously paid over the relevant period.
Hi-tech industries – properties containing office space or research and development laboratories that comprise at least 40% of lettable area.
IMF international money fund – an organization of 185 member countries. Among other aims it was established to promote international monetary co-operation, and provide temporary financial assistance to countries. Related to the world bank.
Index (stock index) – is a means of measuring returns from and performance of a portfolio of selected investments. The S & P / ASX200 index, or the S & P /ASX200 property trust accumulation index were created for the ASX, and are designed to act as a proxy for the overall performance of the larger vehicles in the market or sector. In general, indices may be calculated in different ways for example a value weighted index os one in which each stock affects the index in proportion to its market value. The above mentioned indices are value weighted.
Indexing – a passive portfolio management strategy that seeks to match the composition and therefore the performance of a selected market index.
Inflation – a measure of the change in the general level of prices. A proxy is generally taken to be the change in the consumer price index.
Inflation target – preferred range for th rate of inflation. It’s a guidance tool for monetary policy. Australia’s inflation target is between 2% - 3%.
Initial yield – the annualized property income expressed as a percentage of the property value.
Internal rate of return (IRR) – the discount rate at which the net present value of an investment is equal to zero. This represents the total rate of return generated by an investment over its life or given timescale, taking into account sale and purchase prices and all cash flows associated with the holding.
Initial public offering (IPO) – a company’s first offering of securities to the public under a prospector PSD.
Lease – a grant of the possession of property to last for a fixed or ascertainable period and usually with the reservation of a rent.
Leasehold – a right to possession and use of land for a fixed and limited period of time. The lease agreement creates this right.
Leased property trust (LPT) – listed property trust. A property trust that is listed on the ASX.
Major regional center – a shopping center incorporating at least one department store, one supermarket, one mini-major and 150 specialties. Has a GLA > 50,000 sqm.
Market capitalization – the value of an LPT as reflected in its stock market price. It is calculated as current price multiplied by units on issue.
Market price – the price actually paid for a property. It differs from market value in that it is an accomplished fact, whereas market value remains an estimate until provided. For LPTs, iit can also refer to the most recent trading price on the ASX.
Market rent – the rental that would apply to a property if space were offered on the open market.
Market value – the highest price estimated in terms of money that a property will bring if exposed or sold in the open market, allowing a reasonable time to find a purchaser who buys with knowledge of all the uses it currently has as well as potential uses and assumes a willing buyer and willing seller.
Mean reversion – the notion that asset value revert to an average value or to an equilibrium value. Thus if an assets price is above its equilibrium value the presumption of mean reversion it that the assets price will eventually decline to its equilibrium value. Similarly if the price is below its equilibrium value the presumption is that the assets price will eventually rise to its equilibrium value.
MER - Management expense ration is the amount of fees charged by the manager divided by the total assets of the trust. This generally includes all ongoing fees. Such as fund management fees, trustee fees and custody fees.
Mini major – a retailer with a large national chain that occupies a smaller NLA than the major stores eg. Rebel sport, sanity, autobarn.
Moving annual turnover (MAT) – gross sales for all contributing retailers represented in a shopping center over a progressive 12 month period.
Net asset banking (NAB) – total assets minus total liabilities.
Neighbourhood center – a local shopping center comprising a supermarket and spcialities GLA < 10,000 sqm.
Net absorption – the difference between space leased and space supplied over a set time period.
Net income – income of the trust that is available to be distributed as calculated under the trust deed.
Net rental income – gross rental income less property expenses.
Net lettable area – the floor area of the building upon which a lease can be created and for which rent can be charged. Used to refer to tenancy areas in office buildings and office and business parks. Normally measured from the internal finished surfaces of permananet external walls and permananet internal walls but excluding features such as balconies and verandahs, common use areas, areas less than 1.5m in height, service areas, and public spaces and throughdares.
Net tangible assets – total assets minus total liabilities minus intangible assets.
Non renounceable rights – the holder of the rights does not have the ability to sell on the ASX.
Occupancy costs – rentals paid and other outgoings incurred.
OECD – organization for economic co-operation and development. Organization that represents 30 contries with a commitment to a market economy. Among other aims it seeks to encourage economic growth and financial stability among member countries.
Option- an option in the right either to buy or to sell a specified amount or value of a particular underlying interest at a fixed exercise price by exercising the option before its specified expiration date. An option which gives a right to buy is a call option, and an option which gives a right to sell is a put option.
Passing rent – the actual rent currently being obtained from a property which may or may not reflect market rent.
Passive management – a portfolio management stratergy that seeks to match the composition and therefore the performance of a selected market index. Also refered to as indexing.
PCP – previous corresponding period.
PIR valuation – pir’s estimate of the fair value of a stock. Our valuation is based on a present value calculation of the expected future distributions generated by the individual trust.
Placement – an off-market issue of units to sophisticated investors generally institutions.
Portfolio turnover (velocity) – a measure of the trading activity in a fund’s portfolio of investments that is how often securities are bought and sold by the fund. Also known as velocity.
Power centre – most often anchored by national or regional “category killer” stored. They range between 25,000 sqm and 75,000 sqm and are dominated by large anchor tenants with few, if any in line tenants. They feature value oriented stores, often with bulk products and a “no-frills” atmosphere.
Product disclosure statement (PDS) – a PDS is the offer document that contains information inviting investment in the securities of an ASIC registered investment scheme. A PDS generally contains financial and other information about the company and its operations as well as risk mitigation strategies.
Price to earnings ratio (P/E ratio) – a method of valuing stocks, calculated by dividing the closing price off a company’s stock by its annual earnings per share. Growth stocks tend to have a high P/E ratios compared to income stocks.
Property trust – a property trust is a vehicle for investors to purchase an interest in a portfolio of real-estate assets. Investors in property trusts typically receive regular rental come through distributions and any capital gains on the assets are also passed on to investors through the trust. There are two main types if trust, A real estate investment trust (REIT) which is a pooled investment whose units are listed in the Australian stock exchange. Unlisted property trust on the other hand are note listed on the exchange.
RBA – the reserve bank of Australia is Australia’s central bank.
Redemption – the sale of units by the unit holder in terms of unlisted property trusts refers to the process of selling units back to the trust.
Regional shopping center – a shopping center incorporating at least on major department store a supermarket and >= 100 specialty stores. GLA >=30,000sqm.
Real-estate investment trust (REIT) - a global term for corporation or trust that pools the capital of investors to purchase and manage income generating property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like stocks. They are also granted special tax considerations.
Refurbishment activity – a refurbishment of part or all of a building usually involving replacement of facades, lifts and other major services and where the space removed from the market for at least six months.
Renounceable rights – the holder of the rights has the ability to sell on the ASX.
Rental income – rents paid by and outgoings recovered from tenants (gross rent has the same meaning.)
Responsible entity (RE) – a public company holding an Australian financial services license who has been authorized by the Australian securities and investment commission to operate a registered managed investment scheme.
Reversionary yield – the anticipated yield to which the initial yield will rise once the rent estimated rental value.
Right of first offer – ROFO has the right to be made an offer before offers from others are considered.
Right of first refusal – ROFR has the right to make an offer, after offers from others are considered.
Right of last offer – ROLO has the right to match the highest offer made to the seller to acquire a property or property interest.
Rights issue – an issue of new shares or units to existing unit holders on a prorate basis. The price paid may be a discounted to current market price. For example a one for their right issue entitles the unit holder to by a unit for ever three helped. Renounceable rights can be traded during the life of the right and non-renounceable rights no not be traded.
Securities – a financial instrument which is a claim over an asset or a future income stream. Examples are bonds and shares.
Scrutisation – the packaging of cash flow producing assets into a marketable security. The process where mortgage backed securities (in the form of bonds) are sold directly into capital markets.
Site coverage ratio – percentage if total site area occupied by the existing building.
Split trust – a trust which offers different classes of units each offering different forms of return. Typically they may consist of growth income or ordinary units.
Split trust – a trust which offers different classes of units, each offering different forms of return. Typically they may consist of growth, income or ordinary units.
Sqm – measurement of square meters or M2
Standard deviation – a commonly used statistical measure of historical volatitily oor risk of a security. The contents of investment returns it measured the extent to which return deviate from the mean (average) return.
Stapled security – when the unitholder owns a unit in the trust and a unit in the attached company, which cannot be separately traded.
Strip shopping center – a shopping center divided into a number of individual units running along a main street, with each shop being entered from the footpath, commonly without commonality of ownership.
Sub-regional center – a shopping center incorporating at least two department stores, two mini-majors two supermarkets and >= 250 specialty stores. GLA > 85,000 sqm.
Switching – the ability to convert units in a split trust into another class of units in the same trust.
Syndicate – a joint venture agreement by a group of investors who pool their funds to purchase and hold a property for a given amount of time. Normally administered by an RE (if registered with ASIC) with ownership vested with an custodian on behalf of investors.
Tax deferred – portion of distribution that are income tax advantaged due to the depreciation of plant and equipment or other allowances, such as establishment cost, nevertheless the cost base of units for calculation of capital gains must be reduced by the amount of tax deferred income received.
Terminal yield – the capitalization rate applied to an investment’s final year cash flow in order to produce an anticipated sale for discontinued cash flow valuations.
Top-down approach – an approach to investing in which the investor first looks at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends.
Tracking error – the difference between the returns achieved on an index based portfolio of assets and the performance achieved by the index it follows. Tracking error measures the standard deviation of the excess returns of a portfolio of securities compared to its benchmark.
Trust deed – a writing or document signed sealed and delivered setting out the terms of an arrangement.
Trustee – one who beneficially holds property on behalf of another under a trust.
Turnover (velocity) – the number of units n a particular stock traded in the ASX over a period of time. Also used to mean the dollar value of sales at a retail store.
Unit holder or holder – the person for the time being registered under the provisions of the trust deed as the holder o a unit in the trust and includes persons jointly registered.
Unit trust – a pooled investment where a number of investors buy units in a trust which in promoted and managed by a professional investment manager. Each investor owns a unit, or a number of them. The value of which depends on the value of those assets owned by the trust.
Utilized property trust – an investment trust vehicle that may undertake one of more public offers to raise capital (equity and or debt) for the purchase or property and operation of a trust. Life expectancy governed only by mandated 80 year maximum.
Unit holder purchase plan – the upp allows unit holders to purchase a limited number of additional unit in the trust at a discount to the market price.
Vacancy – the part of a property that in not subject to a current lease.
Weighting – the portion of different types of asset classes in a portfolio. If a portfolio has more than the normal or commonly accepted or currently provisioned proportion of a particular asset, it may be referred to as being overweight in that asset.
Wholesale property trust – an unlisted property trust that invites investment from ‘sophisticated’ (non-retail) investors via an excluded offer.
Yield – is expressed as a percentage and it simply the ratio of net income from an asset to value of the asset. In terms of a property trust it can be calculated as distribution by market price multiplied by 100.

Property Industry Resources

Safe ASSET Management — Sat, 29 Aug 2009 01:52:09 GMT

Great property articles
When researching in the property market, great focus should be provided by a number of excellent property articles, property industry reports and newspaper articles.
These property articles are largely from property Australia (published by the property council of Australia) and Australian property journal (published by the Australian property institute); often written by leading property professionals in Australia and overseas.
These industry reports are largely from Jones lang LaSalle, UBS, property investment research, investment property databank, property council of Australia, European public real-estate association and others. The generous support of these leading property organizations in providing this often “client only” property information is greatly appreciated in ensuring the successful delivery of this unit and enriching the students understanding of these key aspect of property portfolio analysis/management.
Essential reading
An important requirement for the real-estate industry is to be up-to-date with the investment scene. As such the following is essential reading:

Property journals in your area and country
Financial review including the property investment and managed funds section
Local newspaper like the Sydney morning heralds (http://smh.com.au/ )

In relation to this material and associated websites, you should pay particular attention to the role of property in an investment portfolio. The significance of institutional investors and the range of property investment vehicles now available. I strongly recommend that you read the financial review each day. Particularly the property section. This reading will certainly enrich the overall experience of this unit.

What is the overall scope and purpose of asset management?

Safe ASSET Management — Sat, 29 Aug 2009 01:49:07 GMT

Introduction to investment portfolio management and analysis

Institutional investors
Asset allocation
Risk
Volatility property as an investment option
Property in an investment portfolio
Investment strategies
Diversified investment portfolio
Investment performance indicators

Assessing investment risk and return

Assessing returns
Assessing risk
Risk-adjusted returns ( risk-return diagram, risk return ratio, Sharpe index.)

Mixed asset portfolio analysis

Mixed asset portfolio returns and risk
Efficient frontier
Optimal portfolios

Advanced property portfolio analysis

Inflation-hedging
Beta
Treynor index
Attribution analysis
Tracking error
Property portfolio strategies

Property investment vehicles

Listed property trusts
Unlisted property trusts
Property securities funds
Wholesale property funds
property syndicates
REITs
International property investment vehicles

The Roles, Duties and Responsibilities of the Commercial Property Manager

Safe ASSET Management — Mon, 29 Jun 2009 10:22:40 GMT

2.1 Introduction.
The nature of the property manager’s function in very broad, outline terms. Here the main focus of falls on the roles, duties and responsibilities of the Commercial Property Manager, which, are examined in considerably more detail. This, together with legal fundamentals lay a solid learning foundation for the various other sub-topics program which will follow throughout the rest of semester. We also explore the ‘personality’ side of the Property Management function, where we look at the desirable personal qualities, characteristics, pre-dispositions and aptitudes which are well-suited to a career in Property Management.
• Mr John Derrick, former Head Director of the Property Management Division of FPD Savills (an integrated, internationallybased property services organisation), and since 2000, Business
Development Manager for East Asia Property Services Group.
• Mr Sam Cuccurullo, former NSW Director and since 2001, Regional Director (Aust. & N.Z.) of Asset Management Services at CB Richard Ellis Pty Ltd.
To put it plainly, these gentlemen comprise two of the very best, most senior professionals in the property and asset management industry. Hence, the teaching and learning material from their Guest Lectures are amongst the very best available to students.

2.2 A Preliminary Break-Down of Property Management Roles and Duties.
In light of what you now know from your Week 1 studies, it should be apparent that the Commercial Property Manager’s tasks can be conveniently grouped into the following 4 broad functions :
• Activities which are related to producing income from the subject investment property. These include a wide range of matters such as collecting the rent, administering leases and monitoring and enforcing lease terms and conditions, dealing with tenants and maintaining the existing tenant base, controlling arrears, conducting rental review and lease renewal negotiations as specified in the existing leases, keeping vacancies to a minimum, and providing a hands-on, proactive role in the leasing up of vacant space to new tenants.
• Activities which are associated with the management and minimisation of operating costs in the building, and with maintaining the physical asset. These include the payment of outgoings, the monitoring of outgoings levels, and where possible, working to reduce the level of outgoings (so as to increase the net income from the asset), collecting of tenants’ contributions to outgoings, initiating and negotiating maintenance (and preventative maintenance) contracts, monitoring the performance of those contractors, inspecting the building on a regular basis, keeping the building and its services ‘neat and tidy’ and well-run on a day-today basis, and attending to tenants’ needs and complaints pertaining to building services.
• Activities associated with budgeting and forward-planning in respect to the financial performance of the asset. This function is primarily one of ongoing, never-ending financial analysis. Here the commercial property manager’s skills are virtually identical with those of the commercial valuer. This financial analysis function relates to both the income and outgoings sides of the financial equation. Life Cycle Costing and monitoring functions also frequently come into play here, and can include the preparation of refurbishment plans, the timing of such programs, and major capital plant and equipment replacement or upgrades programs (heating, ventilation, air-conditioning systems, other mechanical services, service cores in office buildings, fire-prevention, etc).
• Activities associated with record-keeping and reporting to the owner. This is the ‘paperwork’ side of the job, and includes maintaining tenancy schedules, billing and invoicing for rentals, recording all details of income and outgoings, whatever their nature may be (this relates to, and assists in, the ‘budgeting’ function mentioned above), trust accounting, the written arrangements and record-keeping pertaining to the payment of outgoings (especially statutory outgoings, energy bills and insurances), upkeep of written records relating to administration of lease documents, written dealings with tenants, solicitors or various statutory authorities, and (most importantly) preparing written reports and advice to the owner on a regular basis, in line with the owner’s instructions. Many expert industry commentators, writers and property academics have, from time-to-time, used their own formats and categorisations to explain the wideranging and often complex nature of the roles, duties and responsibilities of the Commercial Property Manager. However, virtually every facet of the property manager's wide range of activities can be categorised down into one of the 4 basic activity-groups explained above.
To aid in remembering and getting your mind around this functional break-down, think of and gravitate to the four (4) basic operational elements depicted above :

producing income
managing outgoings and building maintenance
financial analysis and forward financial planning
documents, recordkeeping &reporting.

2.3 Roles, Duties and Responsibilities – Teaching Overheads From John Derrick’s (former MG316A) Guest Lectures.
Please refer now to READING No. 2.1 - comprising an 8-page excerpt of teaching overheads from John Derrick’s MG316A Guest Lecture from May 2001 (remember, once again - this former MG316A subject is now known as 200600 from Autumn 2008 onwards - nothing changes but the name-code for the subject - this unit-name code has been dictated to us by the College of Business management). Please read and absorb the contents of each of the overheads. You will see that John Derrick introduces a grouping of Property Management roles, duties and responsibilities based on a four-element break-up, as follows :

Financial Management
Lease Management
Property Maintenance
Asset Management

Sydney Morning Herald press article, authored by John Derrick and entitled Are Agencies Losing Touch ?, has also been included for your edification. Please read the article carefully, as it provides you with valuable insights into several important principles. For example, Derrick highlights the close similarity between the skills and functions of Valuation and Property Management - particularly when it comes to financial analysis requirements. These are skills not necessarily always found in Sales and Leasing practitioners. In addition, Derrick emphasises the importance of ‘getting the basics right’ in the property management function - which includes the vital requirement for a sound attention to detail. Here, once more, the similarities between Valuation and Property Management are highlighted - both disciplines are built around this essential, crucial attention to detail factor. To put it bluntly, those property students who dislike or cannot muster this personal quality (i.e. a close-order attention to fine detail), in an occupational context, probably should NOT consider a career in either of these two fields. In both his teaching overheads and his press article, John Derrick introduces the Asset Management element. Within the Australian Commercial Property Markets, the distinction between the functions of mainstream Property Management and higher-echelon Asset Management is often a ‘fuzzy’ and ‘hazy’ one, with no clear delineation between the two roles in many property management workplace environments. We will examine the property and Asset Management relationship in more detail during the teaching program.

2.4 Roles, Duties and Responsibilities – Teaching Overheads From Sam Cuccurullo’s (Former MG316A) Guest Lectures.
Please refer now to READING No. 2.2 - comprising an 8-page excerpt of teaching overheads from Sam Cuccurullo’s 200600 (internal full-time delivery mode) Guest Lecture from April 2001. Note - as mentioned by your Lecturer in Week 1 - that MG316A is now known as 200600 in 2008.
Please read and absorb the contents of each of Sam’s overheads. There are both similarities and differences between Sam Cuccurullo’’s and John Derrick’s treatments of the break-up of roles and duties of the Commercial Property Manager - however in essence, both industry Guest Lecturers adopt the same general thrust of direction.
This overhead neatly summarises and demonstrates well, the wide gamut of the Property Manager’s base of operations, and the multi-disciplined nature of the job in commercial investment scenarios.
Sam Cuccurullo’s lecture overheads also notably introduce the 3-element classification of roles and duties into:
• Financial Administration
• Physical Administration
• Estate Administration
This 3-element grouping constitutes the most widely-recognised, logical break-up of CPM duties, roles and responsibilities. It also comprises the standard format of management roles and duties which is commonly found and described in most Managing Agency Agreements. Most practitioners within the industry are soundly familiar with this 3-element classification. Even under this ‘mainstream’ industry format, however, the specific sub-component duties within each of the three primary categories will, on occasion, tend to differ, depending on the requirements of the particular Agency Agreement document which is framed to meet the subject management scenario. Furthermore, different literature sources tend to include and describe slightly different specific duties within each of the 3 categories. You will see upcoming, where you are provided with 'real-world' examples of Managing Agency Agreement documents in your Book of Readings.

In his Guest Lecture presentation, Sam provides a more detailed explanation of each of the various sub-components within the 3-element break down of Financial, Physical and Estate Administration.

2.5 The ‘Traditional’ Break-up of Duties - Financial Management, Estate Administration, and Physical Management - in More Detail.
Please refer to Sam Cuccurullo’s very last overhead in where the 3 - element breakup into Financial, Estate and Physical Management headings contains extra point-form lists of activities under each of the 3 headings. Use the contents of this overhead as a checklist while you read the following explanations.

2.5.1 FINANCIAL MANAGEMENT.
Monthly Statements.
This constitutes a ‘balance-sheet’ accounting activity, relating to all items of income and expenditure (rentals v. outgoings) arising out of the subject property on a monthly basis. Such a statement frequently forms part of the monthly report to the owner.

Transaction Reports.
This relates to periodic or irregular expenditures, such as expenses associated with regular outgoings, or with repair and maintenance activities, or payments made to the various contractors who are engaged to service the building.

Arrears Report.
This relates to overdue rental payments on the part of the existing tenancy base, and is usually prepared on a weekly basis. In respect to non-payment of outstanding rental arrears in commercial premises, eviction powers can be invoked after 14 days, however in practical terms, this should be regarded as a ‘last resort’ by the property manager.

Cash and Accrual Accounting.
These are two different forms of accounting practice. Either type may be applied, depending on the circumstances which exist.

Cash accounting means that income and expenditure are registered and recorded in the balance sheets in full, as complete amounts, at the time they are received or paid.
Accrual accounting refers to a system where big, one-out, ‘lumpy’-type outgoings (such as Land Tax) are registered and recorded on a proportional basis in the balance sheets over a 12-month period, as opposed to being recorded as a single large lump sum at one time. In other words, such expenses are ‘spread out’ over the year, using monthly apportionments for accounting purposes. This type of accounting practice commonly applies in Listed Property Trust portfolios, for example.

Invoicing of Rents / Payment of Invoices For Expenses.
The practice of issuing invoices for rental collections is not a statutory nor a lease requirement. However according to Sam Cuccurullo, the use of invoices assists in good accurate record-keeping, and is a useful tool in the preparation of annual budgets and yearly reports.
In respect to the payment of invoices for various kinds of operating expenses, property managers should ensure that they are granted the relevant authority, from the owner, to make payment for same. Such authority will normally be specified in the Managing Agency Agreement.

Annual Budgets.
Property managers are usually responsible for the preparation of annual budgets, detailing projections for income and expenditure for the subject property.

Outgoings Recoveries.
The extent of recovery of outgoings from tenants depends on the terms and conditions specified in each lease document. Commercial Rentals and Leases are usually structured on either a Gross or a Net basis. The nature of Gross and Net Rentals and Leases will be discussed in more detail later in the content.

2.5.2 ESTATE ADMINISTRATION
Lease Administration.
The Property Manager must keep and have all lease documents in their possession, as a matter of elementary professional record-keeping, and must make themselves fully familiar with the terms and conditions of each of them. There is simply no other way in which to establish the basis for monitoring the behavior of tenants, so as to ensure that lease covenants are adhered to. However, both the owner (through the managing agent) AND the tenants must adhere to their agreements under the lease - so the property manager’s function here is two-fold.

Up To Date Tenancy Schedule.
The maintenance of an up-to-date tenancy schedule constitutes yet another basic element of professional record-keeping. Such a schedule provides a convenient ready-reckoner as to the amount of untenanted vacant space in the building at any one time, signifying the need to re-let such space. Tenancy records also assist in the easy recall of all relevant lease and tenant data at times when reports to the owner are required. This example is provided, once more, courtesy of Sam Cuccurullo, from his previous Guest Lecture materials in this subject.

Occupancy Documents.
Additional to leases, a whole range of possible legally-binding documents and agreements may apply to a given building. These all require management and filing. Examples under this category can comprise the following :
• Naming and Signage Rights Agreements
• Licence Agreements
• Car Park Licences
• Rights-of-Way and Easements over the subject property
• Lease Assignments and Sub-Leases
• Rooftop Micro-Wave / Telecommunication Licences and associated Rental Agreements
• Local Council-related Legal Occupancy and Use Documents

Instructions To Solicitors.
Both of our senior industry Guest Lecturers in this subject, John Derrick and Sam Cuccurullo, point out in their lecture addresses that it IS NOT the property manager’s duty to draw up new lease documents each time a tenancy is renewed, or when vacant lettable space in the building is leased out and filled. That job of drafting and creating the formal lease documents is the responsibility of the solicitor.

However, it is the property manager’s responsibility to conduct a role in lease negotiations, and to help determine the final lease terms and conditions which are agreed upon by both lessor and lessee. Hence, while not physically drawing up the lease documents, it is nevertheless the property manager's responsibility to advise the solicitor as to all relevant information that needs to be inserted into the lease document. Such advice is prepared by the Property Manager in a schedule-format, and is then forwarded to the solicitor so that he/she may create and draft the legallybinding lease document. The same process applies for any other occupancy agreement (see examples above - licences, assignments, etc) Clearly, you can appreciate that it is crucial that such information provided by the Property Manager to the solicitor is complete and fully accurate - due to the legally-binding nature of the lease (or other occupancy document), and the professional liability issues at stake for the CPM if errors are committed. Where a representative example of Lease Instructions to a solicitor is provided for your perusal - courtesy, again, of our good friend Sam Cuccurullo. Read and analyse this schedule carefully - note the depth and DETAIL of the information required. Such a document-example also helps you to better appreciate why an attention-to-detail is a crucial personal characteristic for
the Property Manager to possess.

Analysis of Lease Deals and Leasing of Vacant Space.
Analysis of lease deals is a very important property management activity and is inherently linked to the financial analysis function. Rental levels struck in the subject leases need to be constantly monitored (especially in respect to rental reviews under existing leases), and measured against current market levels to ensure that a buoyancy of income is maintained. Here, as in other activities already mentioned, the skills of the Commercial Property Manager are almost identical with those of the Commercial Valuer (market knowledge, financial appraisal techniques, attention to detail).
The presence of vacancies must be minimised, since this represents ‘dead’ leaseable space and a ‘hole’ or ‘gap’ in the optimum cashflow from the investment. Property Managers must align leasing strategies and leasing deals with the owner’s investment objectives. Therefore, managers play a crucial role in providing advice to the leasing and marketing specialists (who frequently are the ones who actually line up the leasing deals in large investment properties) and liaising closely with them throughout the lease negotiation process. In many smaller investment properties, the Property Manager will conduct the leasing and marketing functions themselves, without any involvement at all by other agencybased leasing or marketing specialists.

Records and Tenancy Files.
This constitutes part of the standard record-keeping and ‘paper-work’ function in the property management process. All official documents (leases, occupancy rights, use rights, building services, maintenance contracts, correspondence etc) must be filed and be readily retrievable for use as and when required. A records system must also be maintained for a wide range of other procedural activities, such as establishing various insurances in the subject building. Similarly, all correspondence to and from tenants must be held in the tenancy-file records for future reference, should later action or follow-ups be required.

Compliance With Covenants of Leases.
The term ‘covenants’ refers to the 'promises' made by each party to the lease (lessor and lessee), which are embodied in the wide range of lease terms and conditions which the parties agree to when leases are entered to. The Property Manager’s legal obligations require him / her to ensure that all lease covenants are adhered to - by both parties (landlord and tenant). In practice, however, this involves monitoring tenants’ behaviour and their adherence to lease terms and
conditions more so than the owner’s, since the Property Manager acts as the owner’s agent and hence will (or should, if they are competent performers) naturally ensure that the owner’s side of the bargain is upheld. Thus the Property Manager will monitor tenants’ behaviour (and that involving third parties, in some instances) and the breaking of any promises made under the
binding lease, in respect to lease covenants such as ‘make good’ clauses, tenants' contribution to and payment of outgoings, arrangements for repairs and maintenance of the premises, the rental paid (on time), the tenant’s right to quiet enjoyment, and assignment and sub-lease situations.

2.5.3 PHYSICAL MANAGEMENT
Comprehensive and Preventative Maintenance Contracts.
These are two quite different types of maintenance contracts, frequently employed on an outsourced basis by the Property Manager in larger buildings for the purpose of maintaining the quality of building services.

A Comprehensive Contract is similar in nature to a ‘fixed price’ construction contract from the world of property development. Under this scenario, a contractor enters into an agreement with the property manager to maintain and repair specified subject building services, or major plant and equipment items, for a Fixed Price and for a Fixed Term (e.g. 5 years). Regardless of whatever breakdown or other ‘problem’ which might occur, the contractor conducts a complete rectification of the problem within the confines of the ‘fixed-price’ already agreed to under the maintenance contract. Variations to the ‘fixed-price’ arrangement can be invoked in some cases, to meet special needs or circumstances. It is common, for example, to employ a Comprehensive Contract in respect to lift maintenance in large, high-rise office buildings.

A Preventative Maintenance Contract is different in its nature. Only the ‘maintenance’ element is included within the agreed contract price. Where breakdowns occur and repairs become necessary, then the repair and rectification costs are charged out additionally, over and above the contract price. It is common, for example, to arrange a Preventative Maintenance Contract in respect to air-conditioning services within large, high-rise office buildings.
A third possible type of maintenance contract, according to Sam Cuccurullo, comprises what is known as a ‘Fix and Do’ contract, where the contractor charges for repairs performed on a ‘per job’ basis, but where no regular ongoing maintenance or routine upkeep work is performed at all by the contractor.
Basically, the choice of contract arrangement is up to the individual property manager, and will be decided upon contingent on the particular needs and circumstances which apply to the subject building (or buildings) being managed.

Control of On-Site Staff.
Some commercial buildings (e.g. CBD office towers) are sufficiently large and complex enough so as to require the presence of permanent or part-time lowerechelon on-site staff, to assist the property manager in various roles – for example, of maintaining the building services, attending to tenants’ needs, and enforcing security arrangements. Such on-site staff may go by a number of
possible titles (e.g. ‘Building Supervisor’, ‘Building Services Manager’, or ‘Operations Manager’), and may perform a range of possible duties - such as engineering services, security, concierge, or car-park attendance. It is the Property Manager’s responsibility to manage such staff, and to liaise with them on a regular basis.

Calling Tenders and Formalising Contracts.
It is the Property Manager’s task to manage, where appropriate and where used, the tendering process for a wide range of building operating and maintenance services - e.g. security, cleaning, mechanical services, pest control, air-conditioning and cooling-towers, lifts, basement carparks.
These services are frequently engaged on a contract basis (particularly in large, complex commercial buildings), and so the Property Manager must not only call for tenders in the first instance, but also must then negotiate such contracts with the winning tenderer, manage them in an ongoing context, and monitor the performance of the contractors so engaged.
Building services contracts extend for different periods of time (e.g. monthly, annually, 2-yearly, 5-yearly etc), depending on the circumstances. It is customary practice in large commercial buildings, for example, to arrange for cleaning contracts on a monthly or quarterly basis only, while lift-maintenance and other major plant and equipment servicing contracts may extend for much longer periods between renewals (such as 2, 3 or 5 years at a time).

Review of Expenses and Cost-Saving Measures.
One of the most important activities in the Commercial Property Manager’s range of duties is to review and analyse the level of building operating expenses on a monthly basis. This is done in order to compare actuals, item-by-item, with the budget estimates which were established at the start of the financial year. Moreover, the property manager must also periodically monitor the level of outgoings, measuring actual operating costs in the subject building (especially in
large commercial office buildings) against industry benchmarks. Such benchmark guides are published regularly by the Property Council of Australia as a service to property managers and the property industry in general. Where subject building outgoings deviate from industry benchmark norms, it is necessary for the property manager to investigate the reasons why – particularly where outgoings are excessive compared to benchmark rates - and to take action
to control and minimise them. The level of actual outgoings - various building operating costs - can effectively be controlled and in many cases significantly reduced, by adopting a pro-active management approach as opposed to a reactive one. A number of strategies are possible to achieve this.

2.6 Reading No. 2.4 - The Australian Property Institute’s Professional Practice Standards. Guidance Note 3 - Due Diligence.
The Australian Property Institute (API) publishes a lengthy document known as Professional Practice. A major component of the document comprises a series of Guidance Notes, designed to assist property professionals in their industry practice, across a spectrum of different disciplines.
Please refer now to READING No. 2.4. This Reading comprises the API’s year 2002 edition of Guidance Note 3, which relates to the Due Diligence process.
While ‘Due Diligence’ is a process normally associated with and conducted by Valuers, it is nevertheless important that Property Managers are fully conversant with the Due Diligence process. Valuers will frequently seek the active participation or co-operation of Property Managers in providing key information required for a Due Diligence audit. It will also sometimes be the case that the Commercial Property Manager will be called upon to directly carry out a Due Diligence audit themselves, in cases where an investment property is being added to the management portfolio.
Students of the Commercial Property Management process can learn much from the API’s Guidance Note 3 on Due Diligence - hence the rationale for its inclusion in the Week 2 Readings for this subject. Please study this Reading thoroughly. It provides a very handy ‘check-list’ for
Commercial Property Management students, as to the wide range of matters which require the manager’s knowledge and attention - even on a day-to-day management basis, quite apart from the formal Due Diligence process. Work through the Guidance Note 3 document which has been provided for you. Note the plethora of factors which are covered in the Due Diligence process – for example :

financial appraisal techniques
land and title details
location, services, town planning, building improvements
tenancy and market analysis
building services and structural integrity
characteristics of different types of commercial buildings
environmental audits

The Commercial Property Manager is required to possess a sound working knowledge and familiarity with every category of investigation mentioned in Guidance Note 3 - if they hope to be able to conduct their duties and responsibilities in a competent, professional manner.

2.7 Desirable Personal Qualities in Commercial Property Management.
To complete your Week 2 studies, it is appropriate to examine the personal qualities and behavioural characteristics which constitute desirable traits in the conduct of the property management process. Let there be no doubt on this score - not every aspiring student or property practitioner is cut out to be a competent Property Manager.
In other words, property management is NOT a suitable profession for ALL people who aspire to a career (of some kind) in the property industry. The job requires a combination of certain personal traits and desirable qualities in order that it may produce not only competent job performance by those concerned, but also job satisfaction to those who choose to enter the profession. which deals with the important issue of professional ethics.
It is worth noting that the personal qualities which are suited to a career in Commercial Property Management are ALSO those which are well suited to a career in Commercial Valuation. Both of our former industry Guest Lecturers for this subject, John Derrick and Sam Cuccurullo, have repeatedly stated their conviction that property managers and valuers are, in effect, ‘brothers-in-arms’ in terms of their roles in the property industry. The requirements and desirable personal qualities in Sales and Leasing careers are, by comparison, by virtue of the different roles involved, in fact noticeably different, more often than not, to the manager / valuer ‘brotherhood’.

The Fundamental Roles and Objective of the Commercial Property Manager

Safe ASSET Management — Thu, 18 Jun 2009 13:22:58 GMT

Think about how you would answer this question :
In the broadest and most fundamental sense, what is the over-riding constant objective of a Property Manager ?
The suggested answer is as follows : To perpetually strive to improve the financial performance of an investment property on behalf of the owner.
The important words here are underlined : 'financial performance', and 'on behalf of the owner'. This, in essence, is what Commercial Property Management (or any form of property management, for that matter) is all about, in the most fundamental of terms.

Now - another question : How is the above-mentioned goal achieved ?
The Suggested Answer is as follows :

By maximising income and capital value growth in the asset.
exercising control and minimisation of building operating costs (i.e. outgoings), and also the level of tenant vacancies.
closely monitoring, engaging in forward planning, and budgeting ahead - for all of the above factors (income, capital growth, costs, vacancies) - plus attending to the physical maintenance of the property investment asset and associated future life-cycle costing / added value issues.
maintaining a healthy relationship with both the property owner (the client) and the tenants (i.e. the customers).
conducting all of the above functions in accordance with the Owner's Instructions, and ALSO in accordance with all relevant legal / legislative requirements.

These functions, in essence, describe the fundamental roles of the Commercial Property Manager.

The Property Management Process - First Principles.
In an introductory context, it is appropriate at this point in your initial studies to make the following basic points about the Property Management process :

In its time-honoured traditional sense, Property Management normally implies an AGENCY relationship between a property owner and a property manager, and the provision of a service by the manager, to the owner, for a fee. This relationship is established via a Management Agency Agreement (which is a form of legally-binding CONTRACT). You will learn more about the binding aspects of the law of real estate agency and Property Management over the next few weeks.
At law, the Property Manager is granted authority to act on behalf of the owner. In an agency relationship, the owner usually adopts a largely handsoff role. The Property Manager's role in respect to the subject property is entirely hands-on.
Property Management is primarily concerned with income-producing property. This can consist of residential uses / classes, commercial uses / classes, or a combination of both in the one building. The source of income is primarily derived from the leasing out of the available NLA (net lettable area) of floor space in the building to tenants. Other, less directly noticeable ways of generating income in a commercial building DO exist, and are available to the Property Manager.
It is very important to realise that different owners will frequently have different INVESTMENT GOALS. The Property Manager must liaise very closely with the owner from the outset of the managing agency agreement (and indeed, well before the signing of the agreement) to identify the owner's exact range of investment goals, and be guided by them always, in the particular mode of management applied to a subject commercial building. Moreover, the Property Manager is legally obliged to report back to the owner, on a regular basis (often, in fact usually, this is done monthly), on various aspects pertaining to the performance of the subject property - investment asset.
Commercial Property Managers should think - constantly - in Property Investment terms. The Commercial Property Manager's approach should actually be very similar to that of the commercial valuer. The asset being managed is, after all, nothing more or less than a vehicle for providing cash-flow for the owner (who is also the investor). The element of RISK MANAGEMENT is therefore inherent in the Property Management function. You should seek to identify the various avenues where Investment and Management Risk can occur in Real Estate as a capital asset class - particularly commercial classes of property.
The Property Manager has a professional duty and occupational obligation to three (3) parties : the client (i.e. the property owner), the customer (i.e. the tenant who provides the income for the investment), and the real estate company which EMPLOYS him / her on its payroll (the chief obligation here, apart from competently performing all ordinary duties, is to generate business and income for the company who employs you, and to foster clients).
In a modern-day, contemporary, sophisticated context, the Property Manager's role should be a PRO-ACTIVE one, as opposed to a reactive one.

The Importance of a Property Management
Department in a Real Estate Agency Firm.
Within the Australian property industry, the traditional major avenues of employment opportunities in Commercial Property Management have historically tended to occur within the orthodox-type major CBD-based real estate agency firms. These agency firms characteristically contain numerous Departments or Divisions - for example, Sales, Leasing, Professional Services / Valuation, Research, Project Management, Corporate Advisory and so on. Invariably, a Property Management Department (usually specialising in commercial property management in these big CBD-based agency firms) is included within such a multi-disciplinary spectrum of agency-based property services.
In addition, nowadays much smaller, more specifically-dedicated set-piece commercial property management firms also exist (e.g. Byvan, specialising in retail property management). Moreover, large institutional-level investment organisations have, over the last decade or more, made major inroads into the industry’s demand-levels for Commercial Property Managers, in terms of employment / recruitment - but on a purely in-house, non-agency basis.
However, the major CBD-based multi-purpose agency firm still fits the industry ‘norm’, rather than the ‘exception’, when it comes to the provision of property
management services within the industry - particularly from the legal perspective of an agency-based relationship between the client and the service-provider.
Therefore, it is relevant at this early stage of your studies to briefly examine the importance of the role of a Property Management Department in a multi-purpose agency-based property-services organisation. The presence of a Property

Management arm is important to such large agency firms for the following reasons :

The Property Management function maintains a secure source of fixed and regular business income for the real estate firm - particularly when ‘times are tough’ during periods of economic and property-market recession, when sales / leasing turnover volumes and income levels fall away.
Property Management is not as affected, in relative terms, by negative economic cycles and recessions, compared to sales and leasing. The company’s income from property management services (and by inference, job security for staff on the property management division’s payroll) is more recession-resistant.
A well-run Property Management Department enhances and ‘rounds out’ the professional business image and reputation of a top-end major-player real estate agency firm, by giving the firm a wellrounded holistic industry profile.
The value of the Rent Roll held and maintained by the Property Management Department constitutes a clear, tangible, measurable element of capital value for the business. In other words, it comprises a saleable tangible asset, in a business context, with additional potential saleable goodwill value flowing out of this arm of the real estate firm.
A firm’s Property Management Department can frequently generate business for the real estate agency firm via lead-ins and flow-ons to other departments in the same firm (e.g. sales / leasing, valuation / professional consultancy, research or corporate advisory services) arising out of an initial client / property management contact.
Similarly, in reverse, the Property Management Department can frequently receive client referrals which emanate from an initial client contact in other property-services domains provided by the same company (e.g. sales, leasing, valuation).
The Property Management Department serves as a potential in-house research and data-source (market information and personal expertise) which other departments within the firm can use for their own business-related and income-earning purposes.
In this regard, the sales and leasing departments, and especially the Valuation Division within the real estate agency firm, will invariably find the Property Management staff very useful people to have around, when a job in their domain is urgent, and essential data / market evidence is lacking.

Commercial Property Management - Knowing Your Client’s Investment Objectives.
One of the most important elements of the Commercial Property Manager’s wide range of professional duties and obligations is having a sound understanding of the client’s (i.e. the property owner’s) particular investment objectives. The process begins with an understanding of the owner’s background. The range of possible different types of investors is wide, and may include the following categories :

Listed or unlisted Property Trusts.
Other top-end, so-called ‘institutional grade investors - e.g. superannuation and life insurance companies, and various investment trust and share-listed growth funds.
Private and share-listed companies.
Syndicates of large or smaller-grade investors.
Government and semi-government authorities.
Single owners - the smallest scale of investors.

Having identified where the client fits into the commercial property investment market spectrum, it is then necessary to identify the client’s (i.e. the property owner’s) particular investment objectives. In this regard, the following important elements require identification by the Commercial Property Manager :

the owner’s required return from investing in the subject property asset.
the acceptable risk exposure from the owner’s perspective.
the required holding period of the property investment asset.
the required mix of income and capital growth.
the owner’s preferred market class and sub-sector.
the taxation and leverage positions pertaining to both the owner’s
business position, and the property investment asset which is the subject of the property management agreement.
whether the owner wishes to adopt a more distant ‘hands-off ‘ or a more direct ‘hands-on’ role in their approach to the subject property investment asset, and in their relationship with the property manager and the management of the property.
the owner’s reporting requirements - i.e. how frequently should the Property Manager report back to the owner in respect to the subject property’s investment performance, and what information should be contained within such reports.
the level of freedom which the owner will allow the Property Manager to enjoy, and the extent of the authority granted by the owner for the Property Manager to act on the owner’s behalf.

Moreover, the Commercial Property Manager must be perpetually mindful of the owner’s permanent background (i.e. underlying) expectations and perspectives. A checklist in this regard might well include the following considerations :

the subject commercial property is viewed as an income-producing asset.
income maximisation is therefore paramount from the owner’s AND the property manager’s perspective. However, remarkably often, owners (sometimes only ‘semi-educated’, so to speak, in Property Market matters) will possess excessive levels of greed, resulting in quite unrealistic income expectations from the property, as well as for capital growth in market terms. One of the key frequent functions of the Commercial Property Manager, therefore, is to help
put the owner’s greed levels or over-optimistic mindset into a more worldly, realistic perspective, when it comes to realisable marketbased levels of income and / or capital growth obtainable from the property (which, of course, are subject to very finite levels only).
Allied to the above, the certainty and regularity of income obtainable from the property is a key consideration for the Commercial Property Manager.
Both the owner and property manager need to be constantly mindful of the LAW pertaining to real estate management, and the manner in which the law recognises the owner / agency agreement (i.e. the Managing Agency Agreement). The legally-binding nature of the relationship between the parties, and the legal enforceability of the Managing Agency Agreement (i.e. the contract between the parties) is an ever-present consideration, as is the ability for each party to SUE the other for damages in worst-case scenarios (arising out of breach of contract and subsequent financial loss).
It is in the interests of both parties (owner and manager) to seek to minimise the level of outgoings and operating costs of running the subject building.
Similarly, it is in the interests of both parties to seek to maximise cash-flow by minimising tenant vacancies and arrears (delayed nonpayment by tenants of rental due under the lease).
Both parties generally wish to see efforts made to maximise the asset value of the property, and to keep the asset physically wellmaintained.
Both parties generally seek to achieve risk avoidance and riskminimisation strategies employed in the management of the asset.
Generally speaking, the owner (i.e. the investor) will tend to seek and adopt more of a ‘hands-off’, low-profile approach in relation to the operation, functioning and efficient financial performance of the investment asset. After all, most investors take the view that they pay the property manager a considerable fee to do just that for them, on their behalf.

Commercial Property Management

Safe ASSET Management — Thu, 18 Jun 2009 13:09:38 GMT

The Commercial Property Manager plays a pivotal 'lynch-pin' role in the overall property investment process. In fact, one could say that Commercial Property & Asset Management constitutes the ENGINE ROOM which DRIVES the entire commercial property investment management process - preparing the crucial management groundwork & data upon which higher-echelon strategic investment decision-making is done (e.g. in upper-end portfolio & funds-management arenas). Like most other professional disciplines in the property industry, Commercial Property Management (CPM for short) is very much a PEOPLE business. Many would argue that the development of high-quality inter-personal skills is perhaps even more important in the property management domain, compared to most other available property career options. Few industry experts would dispute that one of the chief responsibilities of the property manager, particularly in commercial investment property arenas, is the maintenance of good working relationships with both owners and tenants, together with a genuine appreciation of their respective wants, needs and priorities in a business context. The Commercial Property Manager also enjoys close linkages with other property professionals such as higher-level investment analysts, developers, agency-based marketing and leasing specialists, property-market researchers, and valuers. Hence, it can be seen that the inter-personal side of the Property Manager's skills base has a pronounced multi-dimensional nature to it. Suffice to say that a career in the Property and Asset Management sector of the property industry is not considered suitable for those who do not enjoy working closely with other people, nor for those who are unable to foster an interest in the needs and personal priorities of their clients and customers. As we move headlong through the first decade of the New Millennium, it is beyond dispute that good, astute, highly-competent, multi-skilled Commercial Property and Asset Managers are held in ever-increasing levels of high esteem within the property industry. In addition, considerably attractive prospects exist within the Management sector of the Commercial Property Industry for very significant career advancement beyond basic property management functions. Attractive opportunities exist for rapid progression into higher-echelon domains in corporate asset and portfolio management, and beyond that, into funds management at top-end institutional investor levels.

The Financial Crisis and the Systemic Failure of Academic Economics

Safe ASSET Management — Fri, 22 May 2009 09:19:24 GMT

The Financial Crisis and the Systemic Failure of Academic Economics* >David Colander, Department of Economics Middlebury College Middlebury, VE, USA >>	Hans Föllmer Department of Mathematics Humboldt University Berlin Berlin, Germany >
Armin Haas Potsdam Institute for Climate Impact Research Potsdam, Germany >	Michael Goldberg Whittemore School of Business & Economics University of New Hampshire Durham, NH, USA >
Katarina Juselius Department of Economics University of Copenhagen Copenhagen, Denmark >	Alan Kirman GREQAM, Université d’Aix-Marseille lll, EHESS et IUF Marseille, France >
Thomas Lux 1> Department of Economics University of Kiel & Kiel Institute for the World Economy Kiel, Germany >	Brigitte Sloth Department of Business and Economics University of Southern Denmark Odense, Denmark >

Abstract >: The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

Keywords: financial crisis, academic moral hazard, ethic responsibility of researchers >

1. Introduction

The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession >. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors—including heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy. Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, "systemic crisis" appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon.2 In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession >>. >

The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. Ironically, as the crisis has unfolded, economists have had no choice but to abandon their standard models and to produce hand-waving common-sense remedies. Common-sense advice, although useful, is a poor substitute for an underlying model that can provide much-needed guidance for developing policy and regulation. It is not enough to put the existing model to one side, observing that one needs, "exceptional measures for exceptional times". What we need are models capable of envisaging such "exceptional times".

The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena, which can be found in the work of Walter Bagehot (1873), Axel Leijonhuvfud (2000), Charles

Kindleberger (1989), and Hyman Minsky (1986), to name a few prominent examples. This tradition, however, has been neglected and even suppressed.

The most recent literature provides us with examples of blindness against the upcoming storm that seem odd in retrospect. For example, in their analysis of the risk management implications of CDOs, Krahnen (2005) and Krahnen and Wilde (2006) mention the possibility of an increase of ‘systemic risk.’ But, they conclude that this aspect should not be the concern of the banks engaged in the CDO market, because it is the governments’ responsibility to provide costless insurance against a system-wide crash. On the more theoretical side, a recent and prominent strand of literature essentially argues that consumers and investors are too risk averse because of their memory of the (improbable) event of the Great Depression (e.g., Cogley and Sargent, 2008). Much of the motivation for economics as an academic discipline stems from the desire to explain phenomena like unemployment, boom and bust cycles, and financial crises, but the dominant theoretical model excludes many of the aspects of the economy that will likely lead to a crisis. Confining theoretical models to ‘normal’ times without consideration of such defects might seem contradictory to the focus that the average taxpayer would expect of the scientists on his payroll.

This failure has deep methodological roots. The often heard definition of economics—that it is concerned with the ‘allocation of scarce resources’—is short-sighted and misleading. It reduces economics to the study of optimal decisions in well-specified choice problems. Such research generally loses track of the inherent dynamics of economic systems and the instability that accompanies its complex dynamics. Without an adequate understanding of these processes, one is likely to miss the major factors that influence the economic sphere of our societies. 3 The inadequate definition of economics often leads researchers to disregard questions about the coordination of actors and the possibility of coordination failures. Indeed, analysis of these issues would require a different type of mathematics than that which is generally used now by many prominent economic models. >

Many of the financial economists who developed the theoretical models upon which the modern financial structure is built were well aware of the strong and highly unrealistic restrictions imposed on their models to assure stability. Yet, financial economists gave little warning to the public about the fragility of their models; 4 even as they saw individuals and businesses build a financial system based on their work. There are a number of possible explanations for this failure to warn the public. One is a "lack of understanding" >

explanation--the researchers did not know the models were fragile. We find this explanation highly unlikely; financial engineers are extremely bright, and it is almost inconceivable that such bright individuals did not understand the limitations of the models. A second, more likely explanation, is that they did not consider it their job to warn the public. If that is the cause of their failure, we believe that it involves a misunderstanding of the role of the economist, and involves an ethical breakdown. In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for professional economic scientists. There should be one. >

In the following pages, we identify some major areas of concern in theory and applied methodology and point out their connection to crisis phenomena. We also highlight some promising avenues of study that may provide guidance for future researchers.

2. Models (or the Use of Models) as a Source of Risk
>>

The economic textbook models applied for allocation of scarce resources are predominantly of the Robinson Crusoe (representative agent) type. Financial market models are obtained by letting Robinson manage his financial affairs as a sideline to his well-considered utility maximization over his (finite or infinite) expected lifespan taking into account with correct probabilities all potential future happenings. This approach is mingled with insights from Walrasian general equilibrium theory, in particular the finding of the Arrrow-Debreu two-period model that all uncertainty can be eliminated if only there are enough contingent claims (i.e., appropriate derivative instruments). This theoretical result (a theorem in an extremely stylized model) underlies the belief shared by many economists that the introduction of new classes of derivatives can only be welfare increasing (a view obviously originally shared by former Fed Chairman Greenspan). It is worth emphasizing that this view is not an empirically grounded belief but an opinion derived from a benchmark model that is much too abstract to be confronted with data.

On the practical side, mathematical portfolio and risk management models have been the academic backbone of the tremendous increase of trading volume and diversification of instruments in financial markets. Typically, new derivative products achieve market penetration only if a certain industry standard has been established for pricing and risk management of these products. Mostly, pricing principles are derived from a set of assumptions on an ‘appropriate’ process for the underlying asset, (i.e., the primary assets on which options or forwards are written) together with an equilibrium criterion such as arbitrage-free prices. With that mostly comes advice for hedging the inherent risk of a derivative position by balancing it with other assets that neutralize the risk exposure. The most prominent example is certainly the development of a theory of option pricing by Black and Scholes that eventually (in the eighties) could even be implemented on pocket

calculators. Simultaneously with Black-Scholes option pricing, the same principles led to the widespread introduction of new strategies under the heading of portfolio insurance and dynamic hedging that just tried to implement a theoretically risk-free portfolio composed of both assets and options and keep it risk-free by frequent rebalancing after changes of its input data (e.g., asset prices). For structured products for credit risk, the basic paradigm of derivative pricing – perfect replication – is not applicable so that one has to rely on a kind of rough-and-ready evaluation of these contracts on the base of historical data. Unfortunately, historical data were hardly available in most cases which meant that one had to rely on simulations with relatively arbitrary assumptions on correlations between risks and default probabilities. This makes the theoretical foundations of all these products highly questionable – the equivalent to building a building of cement of which you weren’t sure of the components. The dramatic recent rise of the markets for structured products (most prominently collateralized debt obligations and credit default swaps - CDOs and CDSs) was made possible by development of such simulation-based pricing tools and the adoption of an industry-standard for these under the lead of rating agencies. Barry Eichengreen (2008) rightly points out that the "development of mathematical methods designed to quantify and hedge risk encouraged commercial banks, investment banks and hedge funds to use more leverage" as if the very use of the mathematical methods diminished the underlying risk. He also notes that the models were estimated on data from periods of low volatility and thus could not deal with the arrival of major changes. Worse, it is our contention that such major changes are endemic to the economy and cannot be simply ignored.

What are the flaws of the new unregulated financial markets which have emerged? As we have already pointed out in the introduction, the possibility of systemic risk has not been entirely ignored but it has been defined as lying outside the responsibility of market participants. In this way, moral hazard >>concerning systemic risk has been a necessary and built-in attribute of the system. The neglect of the systemic part in the ‘normal mode of operation’, of course, implies that external effects are not taken properly into account and that in tendency, market participants will ignore the influence of their own behavior on the stability of the system. The interesting aspect is more that this was a known and accepted element of operations. Note that the blame should not only fall on market participants, but also on the deliberate ignoring of the systemic risk factors or the failure to at least point them out to the public amounts to a sort of academic ‘moral hazard’ >>. >

There are some additional aspects as well: asset-pricing and risk management tools are developed from an individualistic perspective, taking as given (ceteris paribus) the behavior of all other market participants. However, popular models might be used by a large number or even the majority of market participants. Similarly, a market participant (e.g., the notorious Long-Term Capital Management) might become so dominant in certain markets that the ceteris paribus >>assumption becomes unrealistic. The simultaneous pursuit >

of identical micro strategies leads to synchronous behavior and mechanic contagion. This simultaneous application might generate an unexpected macro outcome that actually jeopardizes the success of the underlying micro strategies. A perfect illustration is the U.S. stock market crash of October 1987. Triggered by a small decrease of prices, automated hedging strategies produced an avalanche of sell orders that out of the blue led to a fall in U.S. stock indices of about 20 percent within one day. With the massive sales to rebalance their portfolios (along the lines of Black and Scholes), the relevant actors could not realize their attempted incremental adjustments, but rather suffered major losses from the ensuing large macro effect.

A somewhat different aspect is the danger of a control illusion >: The mathematical rigor and numerical precision of risk management and asset pricing tools has a tendency to conceal the weaknesses of models and assumptions to those who have not developed them and do not know the potential weakness of the assumptions and it is indeed this that Eichengreen emphasizes. Naturally, models are only approximations to the real world dynamics and partially built upon quite heroic assumptions (most notoriously: Normality of asset price changes which can be rejected at a confidence level of 99. 9999…. Anyone who has attended a course in first-year statistics can do this within minutes). Of course, considerable progress has been made by moving to more refined models with, e.g., ‘fat-tailed’ Levy processes as their driving factors. However, while such models better capture the intrinsic volatility of markets, their improved performance, taken at face value, might again contribute to enhancing the control illusion of the naïve user. >

The increased sophistication of extant models does, however, not overcome the robustness problem and should not absolve the modelers from explaining their limitations to the users in the financial industry. As in nuclear physics, the tools provided by financial engineering can be put to very different uses so that what is designed as an instrument to hedge risk can become a weapon of ‘financial mass destruction’ (in the words of Warren Buffet) if used for increased leverage. In fact, it appears that derivative positions have been built up often in speculative ways to profit from high returns as long as the downside risk does not materialize. Researchers who develop such models can claim they are neutral academics – developing tools that people are free to use or not. We do not find that view credible. Researchers have an ethical responsibility to point out to the public when the tool that they developed is misused. It is the responsibility of the researcher to make clear from the outset the limitations and underlying assumptions of his models and warn of the dangers of their mechanic application.

What follows from our diagnosis? Market participants and regulators have to become more sensitive towards the potential weaknesses of risk management models. Since we do not know the ‘true’ model, robustness should be a key concern. Model uncertainty should be taken into account by applying more than a single model. For example, one could rely on

probabilistic projections that cover a whole range of specific models (cf., Föllmer, 2008). The theory of robust control provides a toolbox of techniques that could be applied for this purpose, and it is an approach that should be considered.

3. Unrealistic Model Assumptions and Unrealistic Outcomes
>>>>

Many economic models are built upon the twin assumptions of ‘rational expectations’ and a representative agent. ‘Rational expectations’ forces individuals’ expectations into harmony with the structure of the economist’s own model. This concept can be thought of as merely a way to close a model. A behavioral interpretation of rational expectations would imply that individuals and the economist have a complete understanding of the economic mechanisms governing the world. In this sense, rational expectations models do not formalize expectations as such: they are not written down as a component of the model according to some empirical observation of the expectation formation of human actors. Thus, even when applied economics research or psychology provide insights about how individuals actually form expectations, these insights cannot be used within RE models. Leaving no place for imperfect knowledge and adaptive adjustments, rational expectations models are typically found to have dynamics that are not smooth enough to fit economic data well.

Technically, rational expectations models are often framed as dynamic programming problems in macroeconomics. But, dynamic programming models have serious limitations. Specifically, to make them analytically tractable, researchers assume representative agents and rational expectations, which assume away any heterogeneity among economic actors. Such models presume that there is a single model of the economy, which is odd given that even economists are divided in their views about the correct model of the economy. While other currents of research do exist, economic policy advice, particularly in financial economics, has far too often been based (consciously or not) on a set of axioms and hypotheses derived ultimately from a highly limited dynamic control model, using the Robinson approach with ‘rational’ expectations.

The major problem is that despite its many refinements, this is not at all an approach based on, and confirmed by, empirical research. 5 In fact, it stands in stark contrast to a broad set of regularities in human behavior discovered both in psychology and what is called behavioral and experimental economics. The corner stones of many models in finance and macroeconomics are rather maintained despite >>all the contradictory evidence discovered in >

empirical research. Much of this literature shows that human subjects act in a way that bears no resemblance to the rational expectations paradigm and also have problems discovering ‘rational expectations equilibria’ in repeated experimental settings. Rather, agents display various forms of ‘bounded rationality’ using heuristic decision rules and displaying inertia in their reaction to new information. They have also been shown in financial markets to be strongly influenced by emotional and hormonal reactions (see Lo et al. >, 2005, and Coates and Herbert, 2008) Economic modeling has to take such findings seriously. >

What we are arguing is that as a modeling requirement, internal consistency must be complemented with external consistency >>: Economic modeling has to be compatible with insights from other branches of science on human behavior. It is highly problematic to insist on a specific view of humans in economic settings that is irreconcilable with evidence. >

The ‘representative agent’ aspect of many current models in macroeconomics (including macro finance) means that modelers subscribe to the most extreme form of conceptual reductionism >>(Lux and Westerhoff, 2009): by assumption, all concepts applicable to the macro sphere (i.e., the economy or its financial system) are fully reduced to concepts and knowledge for the lower-level domain of the individual agent. It is worth emphasizing that this is quite different from the standard reductionist concept that has become widely accepted in natural sciences. The more standard notion of reductionism amounts to an approach to understanding the nature of complex phenomena by reducing them to the interactions of their parts, allowing for new, emergent phenomena at the higher hierarchical level (the concept of ‘more is different’, cf. Anderson, 1972). >

Quite to the contrary, the representative agent approach in economics has simply set the macro sphere equal to the micro sphere in all respects. One could, indeed, say that this concept negates the existence of a macro sphere and the necessity of investigating macroeconomic phenomena in that it views the entire economy as an organism governed by a universal will. 6 Any notion of "systemic risk" or "coordination failure" is necessarily absent from, and alien to, such a methodology. >

For natural scientists, the distinction between micro-level phenomena and those originating on a macro, system-wide scale from the interaction of microscopic units is well-known. In a dispersed system, the current crisis would be seen as an involuntary emergent phenomenon of the microeconomic activity. The conceptual reductionist paradigm, however, blocks from the outset any understanding of the interplay between the micro and macro levels. The differences between the overall system and its parts remain

simply incomprehensible from the viewpoint of this approach.

In order to develop models that allow us to deduce macro events from microeconomic regularities, economists have to rethink the concept of micro foundations of macroeconomic models. Since economic activity is of an essentially interactive nature, economists’ micro foundations should allow for the interactions of economic agents. Since interaction depends on differences in information, motives, knowledge and capabilities, this implies heterogeneity of agents. For instance, only a sufficiently rich structure of connections between firms, households and a dispersed banking sector will allow us to get a grasp on "systemic risk", domino effects in the financial sector, and their repercussions on consumption and investment. The dominance of the extreme form of conceptual reductionism of the representative agent has prevented economists from even attempting to model such all important phenomena. It is the flawed methodology that is the ultimate reason for the lack of applicability of the standard macro framework to current events.

Since most of what is relevant and interesting in economic life has to do with the interaction and coordination of ensembles of heterogeneous economic actors, the methodological preference for single actor models has extremely handicapped macroeconomic analysis and prevented it from approaching vital topics. For example, the recent surge of research in network theory has received relatively scarce attention in economics. Given the established curriculum of economic programs, an economist would find it much more tractable to study adultery as a dynamic optimization problem of a representative husband, and derive the optimal time path of marital infidelity (and publish his exercise) rather than investigating financial flows in the banking sector within a network theory framework. This is more than unfortunate in view of the network aspects of interbank linkages that have become apparent during the current crisis.

In our view, a change of focus is necessary that takes seriously the regularities in expectation formation revealed by behavioral research and, in fact, gives back an independent role to expectations in economic models. It would also be fallacious to only replace the current paradigm by a representative ‘non-rational’ actor (as it is sometimes done in recent literature). Rather, an appropriate micro foundation >>is needed that considers interaction at a certain level of complexity and extracts macro regularities (where they exist) from microeconomic models with dispersed activity. >

Once one acknowledges the importance of empirically based behavioral micro foundations and the heterogeneity of actors, a rich spectrum of new models becomes available. The dynamic co-evolution of expectations and economic activity would allow one to study out-of-equilibrium dynamics and adaptive adjustments. Such dynamics could reveal the possibility of multiplicity and evolution of equilibria (e.g. with high or low employment) depending on agents’ expectations or even on the propagation of positive or negative

‘moods’ among the population. This would capture the psychological component of the business cycle which – though prominent in many policy-oriented discussions – is never taken into consideration in contemporary macroeconomic models.

It is worth noting that understanding the formation of such low-level equilibria might be much more valuable in coping with major ‘efficiency losses’ by mass unemployment than the pursuit of small ‘inefficiencies’ due to societal decisions on norms such as shop opening times. Models with interacting heterogeneous agents would also open the door to the incorporation of results from other fields: network theory has been mentioned as an obvious example (for models of networks in finance see Allen and Babus, 2008). ‘Self-organized criticality’ theory is another area that seems to have some appeal for explaining boom-and-bust cycles (cf. Scheinkman and Woodford, 1992). Incorporating heterogeneous agents with imperfect knowledge would also provide a better framework for the analysis of the use and dissemination of information through market operations and more direct links of communication. If one accepts that the dispersed economic activity of many economic agents could be described by statistical laws, one might even take stock of methods from statistical physics to model dynamic economic systems (cf. Aoki and Yoshikawa, 2007; Lux, 2009, for examples).

4. Robustness and Data-Driven Empirical Research
>>>>

Currently popular models (in particular: dynamic general equilibrium models) do not only have weak micro foundations, their empirical performance is far from satisfactory (Juselius and Franchi, 2007). Indeed, the relevant strand of empirical economics has more and more avoided testing their models and has instead turned to calibration without explicit consideration of goodness-of-fit. 7 This calibration is done using "deep economic parameters" such as parameters of utility functions derived from microeconomic studies. However, at the risk of being repetitive, it should be emphasized that micro parameters cannot be used directly in the parameterization of a macroeconomic model. The aggregation literature is full of examples that point out the possible "fallacies of composition". The "deep parameters" only seem sensible if one considers the economy as a universal organism without interactions. If interactions are important (as it seems to us they are), the restriction of the parameter space imposed by using micro parameters is inappropriate. >

Another concern is nonstationarity and structural shifts in the underlying data. Macro models, unlike many financial models, are often calibrated over long time horizons which include major changes in the regulatory framework of the countries investigated. Cases in

question are the movements between different exchange rate regimes and the deregulation of financial markets over the 70s and 80s. In summary, it seems to us that much of contemporary empirical work in macroeconomics and finance is driven by the pre-analytic belief in the validity of a certain model. Rather than (mis)using statistics as a means to illustrate these beliefs, the goal should be to put theoretical models to scientific test (as the naïve believer in positive science would expect).

The current approach of using pre-selected models is problematic and we recommend a more data-driven methodology. Instead of starting out with an ad-hoc specification and questionable ceteris paribus >>assumptions, the key features of the data should be explored via data-analytical tools and specification tests. David Hendry provides a well-established empirical methodology for such exploratory data analysis (Hendry, 1995, 2009) as well as a general theory for model selection (Hendry and Krolzig, 2005); clustering techniques such as projection pursuit (e.g. Friedman, 1987) might provide alternatives for the identification of key relationships and the reduction of complexity on the way from empirical measurement to theoretical models. Cointegrated VAR models could provide an avenue towards identification of robust structures within a set of data (Juselius, 2006), for example, the forces that move equilibria (pushing forces >>, which give rise to stochastic trends) and forces that correct deviations from equilibrium (pulling forces >>, which give rise to long-run relations). Interpreted in this way, the ‘general-to-specific’ empirical approach has a good chance of nesting a multivariate, path-dependent data-generating process and relevant dynamic macroeconomic theories. Unlike approaches in which data are silenced by prior restrictions, the Cointegrated VAR model gives the data a rich context in which to speak freely (Hoover et al., 2008). >

A chain of specification tests and estimated statistical models for simultaneous systems would provide a benchmark for the subsequent development of tests of models based on economic behavior: significant and robust relations within a simultaneous system would provide empirical regularities that one would attempt to explain, while the quality of fit of the statistical benchmark would offer a confidence band for more ambitious models. Models that do not reproduce (even) approximately the quality of the fit of statistical models would have to be rejected (the majority of currently popular macroeconomic and macro finance models would not pass this test). Again, we see here an aspect of ethical responsibility >>of researchers: Economic policy models should be theoretically and empirically sound. Economists should avoid giving policy recommendations on the base of models with a weak empirical grounding and should, to the extent possible, make clear to the public how strong the support of the data is for their models and the conclusions drawn from them. >

5. A Research Agenda to Cope with Financial Fragility
>>
The notion of financial fragility implies that a given system might be more or less susceptible to produce crises. It seems clear that financial innovations have made the system more fragile. Apparently, the existing linkages within the worldwide, highly connected financial markets have generated the spillovers from the U.S. subprime problem to other layers of the financial system. Many financial innovations had the effect of creating links between formerly unconnected players. All in all, the degree of connectivity of the system has probably increased enormously over the last decades. As is well known from network theory in natural sciences, a more highly connected system might be more efficient in coping with certain tasks (maybe distributing risk components), but will often also be more vulnerable to shocks and – systemic failure! The systematic analysis of network vulnerability has been undertaken in the computer science and operations research literature (see e.g. Criado et al >>., 2005). Such aspects have, however, been largely absent from discussions in financial economics. The introduction of new derivatives was rather seen through the lens of general equilibrium models: more contingent claims help to achieve higher efficiency. Unfortunately, the claimed efficiency gains through derivatives are merely a theoretical implication of a highly stylized model and, therefore, have to count as a hypothesis. >>Since there is hardly any supporting empirical evidence (or even analysis of this question), the claimed real-world efficiency gains from derivatives are not justified by true science. While the economic argument in favor of ever new derivatives is more one of persuasion rather than evidence, important negative effects have been neglected. The idea that the system was made less risky with the development of more derivatives led to financial actors taking positions with extreme degrees of leverage and the danger of this has not been emphasized enough. >
As we have mentioned, one totally neglected area is the degree of connectivity and its interplay with the stability of the system (see Boesch et al. (2006). We believe that it will be necessary for supervisory authorities to develop a perspective on the network aspects of the financial system, collect appropriate data, define measures of connectivity and perform macro stress testing at the system level. In this way, new measures of financial fragility would be obtained. This would also require a new area of accompanying academic research that looks at agent-based models of the financial system, performs scenario analyses and develops aggregate risk measures. Network theory and the theory of self-organized criticality of highly connected systems would be appropriate starting points.

The danger of systemic risk means that regulation has to be extended from individualistic (regulation of single institutions which of course, is still crucial) to system wide regulation. In the sort of system which is prone to systemic crisis, regulation also has to have a systemic perspective. Academic researchers and supervisory authorities thus have to look into connections within the financial sector and to investigate the repercussions of

problems within one institute on other parts of the system (even across national borders). Certainly, before deciding about the bail-out of a large bank, this implies an understanding of the network. One should know whether its bankruptcy would lead to widespread domino effects or whether contagion would be limited. It seems to us that what regulators provide currently is far from a reliable assessment of such after effects.

Such analysis has to be supported by more traditional approaches: Leverage of financial institutions rose to unprecedented levels prior to the crisis, partly by evading Basle II regulations through special investment vehicles (SIVs). The hedge fund market is still entirely unregulated. The interplay between leverage, connectivity and system risk needs to be investigated at the aggregate level. It is highly likely, that extreme leverage levels of interconnected institutions will be found to impose unacceptable social risk on the public. Prudent capital requirements would be necessary and would require a solid scientific investigation of the above aspects rather than a pre-analytic laissez-faire >attitude. >
We also have to re-investigate the informational role of financial prices and financial contracts. While trading in stock markets is usually interpreted as at least in part transmitting information, this information transmission seems to have broken down in the case of structured financial products. It seems that securitization has rather led to a loss of information by anonymous intermediation (often multiple) between borrowers and lenders. In this way, the informational component has been outsourced to rating agencies and typically, the buyer of CDO tranches would not have spent any effort himself on information acquisition concerning his far away counterparts. However, this centralized information processing instead of the dispersed one in traditional credit relationships might lead to a severe loss of information. As it turned out, standard loan default models failed dramatically in recent years (Rajan et al, 2008). It should also be noted that the price system itself can exacerbate the difficulties in the financial market (see Hellwig, 2008). One of the reasons for the sharp fall in the asset valuations of major banks was not only the loss on the assets on which their derivatives were based, but also the general reaction of the markets to these assets. As markets became aware of the risk involved, all such assets were written down and it was in this way that a small sector of the market "contaminated" the rest. Large parts of the asset holdings of major banks abruptly lost much of their value. Thus the price system itself can be destabilizing as expectations change.

On the macroeconomic level, it would be desirable to develop early warning schemes that indicate the formation of bubbles. Combinations of indicators with time series techniques could be helpful in detecting deviations of financial or other prices from their long-run averages. Indication of structural change (particularly towards non-stationary trajectories) would be a signature of changes of the behavior of market participants of a bubble-type nature.

6. Conclusions
>
The current crisis might be characterized as an example of the final stage of a well-known boom-and-bust pattern that has been repeated so many times in the course of economic history. There are, nevertheless, some aspects that make this crisis different from its predecessors: First, the preceding boom had its origin – at least to a large part – in the development of new financial products that opened up new investment possibilities (while most previous crises were the consequence of overinvestment in new physical investment possibilities). Second, the global dimension of the current crisis is due to the increased connectivity of our already highly interconnected financial system. Both aspects have been largely ignored by academic economics. Research on the origin of instabilities, overinvestment and subsequent slumps has been considered as an exotic side track from the academic research agenda (and the curriculum of most economics programs).This, of course, was because it was incompatible with the premise of the rational representative agent. This paradigm also made economics blind with respect to the role of interactions and connections between actors (such as the changes in the network structure of the financial industry brought about by deregulation and introduction of new structured products). Indeed, much of the work on contagion and herding behavior (see Banerjee, 1992, and Chamley, 2002) which is closely connected to the network structure of the economy has not been incorporated into macroeconomic analysis.

We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises.

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         Reinhart, C. and K. Rogoff, 2008, This Time is Different: A Panoramic View of Eight Centuries of Financial Crises >>. Manuscript, Harvard University and NBER. >
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SafeASSET

The Roles, Functions and Characteristics of ASSET MANAGEMENT

The Management Hierarchy Table

The Evolution of Asset Management and Facilities Management in Australia Since the Mid 1980’s

Facilities Management and Asset Management, and Their Relationship to ‘Mainstream’ Property Management

Listed Property Trusts / A-REITs

Westfield Group

Colonial First State Global Asset Management (Group Ranking)

DEXUS Funds Management Limited

ING Management Limited (Group Ranking)

MACQUARIE Group Limited

Significance of infrastructure

Asset Allocation

Beta Asset Management

Risk management in asset investment

Glossary of Asset Investment Terms

Property Industry Resources

What is the overall scope and purpose of asset management?

The Roles, Duties and Responsibilities of the Commercial Property Manager

The Fundamental Roles and Objective of the Commercial Property Manager

Commercial Property Management

The Financial Crisis and the Systemic Failure of Academic Economics