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					Msc Postgraduate Diploma in Property
     Appraisal & Management




         Portfolio Challenge
           Sponsored by




         Portfolio Analysis
            Project Brief
          17th March - 13th May
Contents


1. Introduction

2. Aims and Objectives

3. Programme of Activities

4. Fund Management Group Allocation

5. Fund Profiles and Mandates

6. Initial Fund Objectives and Annual Performance Review

7. Explanation of Portfolio Terms

8. Project Assessment
1. Introduction

The Investment Property Forum (IPF) Portfolio Challenge has been developed with
the benefit of a generous grant from the IPF Education Trust. You are participating in
a pilot of the project and the operations and feedback from the pilot will be used to
inform the full project due to be launched to a European audience in January 2011.

The project is designed to create an active European community of practice in
applied real estate portfolio management and to manage a dynamic, stimulating and
challenging project to ENSURE that both the theory AND application of advanced
portfolio management is embedded into leading postgraduate courses in Europe. A
further aim of the project is to build relationships between Real Estate courses,
faculty members and staff and their counterparts in Business and Finance to
promote greater shared understanding of property Investment and portfolio
management. The project has attracted significant interest and will be incorporated
in to the teaching of many prestigious courses including those of the European
Business School, ESSEC in Paris and IREBS in Germany.

Your pilot is mainly focusing on UK portfolios with the introduction of European
assets that you can purchase, the final version of the project will include more
European assets to encourage interaction between the many groups that will be
running the simulation across Europe.

The project has been developed with the significant input of fund managers, the IPD
and members of IPF. Luke Armstrong, one of last years PAM students, has also put
a significant amount of work into developing the project, generating appropriate
assets for each fund from data provided by the IPD and ensuring that a students
perspective is embedded into the project.

The Portfolio Challenge is based upon a future of five periods which has been
created using the highly sophisticated modelling software developed by IPD and
OCCUM, which is used by fund managers to model forecasts of the future and to
analyse the potential performance of their funds against the macro economic future
that is predicted. We have generated a future using the IPD multi regression models
which in turn are based on high level data provided by OECD, Experian and other
sources. This future is not necessarily the reality of the next 5 years and will diverge
over time - it is however the future for the portfolio challenge and you MUST ensure
that you work with this future and not try to integrate real data - all data including
econometric feeds, news stories and returns data have been assembled within our
simulated future and you MUST use this to manage your portfolio.
Having constructed a future for the next 5 years, we have then used the model to
predict the performance of the assets that you will be managing against that future.
The simulation is therefore entirely consistent within the predicted future as modelled
by IPD.

Your job as Fund Managers is to interpret the macro econometric data and construct
a strategy which is designed to deliver the performance required by your clients
mandate and to remain within the trading parameters also dictated by your Fund
client. Each group has a different set of unique assets and a different context and
fund mandate. You will be required to monitor the performance of your fund (total
and individual assets) in both basic financial terms, such as cash flow and using
CAPM tools to measure portfolio performance. You will use these tools and
benchmarks to adjust your strategy, stock selection and portfolio composition over
four years of management. You will be seeking to balance and optimise risk and
return in accordance with your clients requirements.

Each period will have a distinct buy and sell phase and you will be able to trade
assets with a view to executing your strategy and improving portfolio performance.

We sincerely hope that you find this a dynamic, stimulating and effective way of
understanding how fund management works, the role of benchmarks and IPD data
and how to apply CAPM tools to improve fund performance.

The IPF, colleagues at SHU and in other Universities believe that this is the most
effective way of allowing students to explore and apply portfolio management theory
to practice and experience for yourselves the reality of fund management.

Finally, we hope you enjoy the experience!
2. Aims and Learning Outcomes

Aims

The broad aim of the project is to demonstrate the practical application of portfolio
management theory to a practical application. It allows students to develop and
apply tools and techniques introduced and explored in Property Analysis to a rich
and realistic dataset provided by the IPD. The project should demonstrate the
importance of understanding and working within a client's portfolio mandate and how
a combination of effective analysis, strong strategy formation and skilled stock
selection can support successful fund management. The project is therefore
designed to collapse boundaries between subjects including Property Analysis,
Economics, Portfolio Management, and Appraisal.


Learning Outcomes

On successful completion of the projects, students should be able to:

      locate relevant data;
      use quantitative techniques of analysis, and interpret the results in the
       property market context;
      develop a critical understanding of the strengths and limitations of these
       techniques and of their appropriate use in the property market;
      develop the skills necessary for the use of a computer spreadsheet, and for
       the analysis and presentation of the results, and for identifying the strengths
       and weaknesses of using a computer spreadsheet in this context
      develop a statistical model of a property variable
      develop a critical understanding of risk and return in property market which
       will systematically lead to the practical application of portfolio theory and the
       capital asset pricing model (CAPM)
      analyse 'specific' and 'systematic' risks , estimate the beta value of a single
       investment and of a portfolio of assets, and distinguish between diversification
       and risk-reduction principles;
      estimate market price of a single asset and locate underpriced and overpriced
       properties using the CAPM for the purpose of giving strategic investment
       advice; and
      develop a reasoned investment strategy and deal with performance
       measurement.
3. Programme of Activities

Working in teams, acting as property investment managers for one of four
Investment Funds you will be required to:


      review the methodology applicable to portfolio decision making and
       formulate a reasoned property investment strategy for your portfolio;



      undertake a detailed appraisal of the existing holdings and undertake
       changes in the fund composition and weighting, using the sale and
       purchase tools provided on the web portal;



      apply performance measurement, benchmark and portfolio analysis to
       the asset data provided to analyse historical returns, beta values,
       sharpe indices and other indicators to support decision making in
       applying the strategy over four one year periods;



      explain the rationale behind your buy and sell decisions in relation to
       your groups methodological interpretation, your funds mandate and
       your asset selection and investment strategy and critically analyse your
       performance.


The project has seven distinct stages:

Period 1     12.00 17/3    to     00.00 26/4   SELL (Your preparation phase.)
Period 2     00.00 26/4    to     12.00 29/4   BUY
Period 3     12.00 29/4    to     00.00 3/5    SELL
Period 4     00.00 3/5     to     12.00 7/5    BUY
Period 5     12.00 7/5     to     00.00 10/5   SELL
Period 6     00.00 10/5    to     12.00 13/5   BUY
Period 7     12.00 13/5    to     00.00        SELL END OF SIMULATION


An executive summary is required from each team by 5pm the next day after the end
of each SELL period: i.e.
Executive Summary 1:              5.00pm on 4/5

Executive Summary 2:              5.00pm on11/5

Final Reflective Summary:         5.00pm on14/5

The Executive Summaries should provide a Performance Review (as detailed in
section 6 ) demonstrating how your portfolio performance has changed over the
period and critically evaluating your strategy and implementation activities over this
period. Your submissions MUST be supported by appropriate reference to the
property investment strategy and underlying methodology.

The Final Reflective Summary should critically evaluate your performance over the
whole period of the simulation and review your performance against the way the
market has moved. You need to be honest and demonstrate how much value added
is due to your performance and how much is through chance or luck. You should use
the analysis and evidence of your annual reviews to inform the Final Reflective
Summary.

The Final Reflective Summary MUST be submitted by 4.00pm on Friday 14th May
2010.
4. Fund Management Group Allocation



Group 1 - Core Fund

Thomas Burlaga

William Howe

Maria Laird

Francois Neyerlinbeale

Laura Thacker

Group 2 - Value Added Fund

Alasdair Cockbain

Timothy Innes

Ting Lian

Dayfydd Owens

Kang Xu

Group 3 - Hybrid Fund

Stephanie Hiscott

Matthew Mitchell

Andrew Playfer

Amy Scales

Group 4 - Opportunistic Fund

Andrew Joy

Kimberley Needham

Marcus Rudkin

Benjamin Wright
5. Fund Profiles and Mandates
...
                                     Portfolio Challenge

Fund 1 – ‘British Electric Pension Fund’

Fund Name: British Electric Pension Fund

Fund Type: The fund is ‘Open Ended’ and is characterised as ‘core’, (see Glossary 'Property
Fund Types') the fund is primarily interested in assets that are capable of providing a secure
and sustainable income in order to service the British Electric Plc's pension scheme.

Scenario: British Electric Plc are one of the UK’s largest energy suppliers, you have recently
acquired British Electric as a client who has accepted you as the property fund manager for
their UK property portfolio. The fund was originally managed by their ‘in-house’ investment
team, due to business restructuring British Electric have decided to outsource the
management of their property portfolio to you.

Fund Profile: The British electric pension fund was created in 1998; their in house property
investment team consistently maintained the required returns outlined in the mandate
produced when the fund was created. The fund like many has reduced the amount of assets it
holds largely due to the economic downturn; this has meant a reduction the total portfolio
value.

The Investor: The fund is owned by one pension fund British Electric, British Electric is one
of the UK’s largest electricity suppliers. The fund was created with the intention to expose
between 7-10 % of their total pension fund to property through direct and indirect property
ownership. The fund under your management represents 6% of their exposure to property, the
remainder of their exposure to property is held in a larger indirect property fund.

Economic Outlook: Over the last 3 years the fund has weathered relatively well in the
difficult economic climate, the previous fund managers disposed of numerous
underperforming assets to maintain the quality of assets in the portfolio. The fund has been
handed over at a critical time; due to numerous asset disposals the portfolio may have lost its
diversification integrity. The market and economy at present appears stable and positive
growth across the sectors is anticipated.




Portfolio Mandate
1.0 Risk and Return

The fund is required to outperform the IPD’s all Pension Fund benchmark by 1% per annum.
The investment strategy of the fund is that of a traditional core fund, assets that are capable of
maintaining consistent returns over time should be acquired. Assets for acquisition are those
associated with good quality buildings, strong covenanted tenants, with longer lease terms.
The fund manager should attempt to minimise risk through the asset diversification at the
sector and geographical level.

1.1 Tracking Error

The fund has a tracking error agreed at 1% per annum. (It should be noted that in order to
calculate the tracking error with regards to portfolio returns there needs to be at least 5 years
of historic portfolio performance).

2.0 Current Stock

The portfolio currently consists of mixed sector properties, including the major property
types: office, industrial & retail, other investments include supermarkets and shopping
centres. There are currently 38 properties held in the portfolio.

The properties in the portfolio range in value from £2 million to larger assets circa £90
million.

2.1 Portfolio Capital value:

The British Electric Pension Fund was valued at Q4 Period 1 at approximately £545,000,000.
(3 years ago the fund was valued at £1.1 billion but through capital depreciation and the sale
of £380 million worth of assets over the period the portfolio has arrived at the present value).

2.2 Gearing

The fund is not geared and does not facilitate debt.

2.3 Asset Disposal and Acquisition Costs

Acquisition Fees, the acquisition of assets will cost 5.75% of the total asset value (See
Glossary 'Asset Acquisition Fees').

Disposal Fees, the disposal of an asset will cost 1.75% (See Glossary 'Asset Disposal Fees').

The fees apply to both U.K. and non U.K. assets.

2.4 New Investment

The fund is a single owned pension fund and no opportunity for further investors is permitted.

3.0 Financial Position
The fund at present has £55,000,000 of available in liquid assets that was raised through one
major disposal prior to the handover of management. Further funding will be achieved
through the disposal of underperforming assets in the portfolio.

3.1 Financial Restrictions

Liquid Capital, it should be understood that in the terms of agreement the fund can not hold
more than 10% of its capital value in liquid assets. Portfolio valuations may have to be
conducted outside of the annual valuation periods in order to document the ratio of liquid
assets to total portfolio value.

Foreign Currency, if a foreign currency is to be held within the fund there must be a rational
for why. This is because holding any alien currency to that of the dominant currency of the
fund exposes the performance of the fund to currency risk, i.e. fluxuations in currency prices
may mean a loss in liquid capital.

If it is intended that another foreign asset be acquired the appropriate currency may be held
within the fund, however a rationale must be provided as a written statement at the annual
review, including the time for which the currency was held.

3.2 Investment Memorandum Agreement (IMA)

Geographical Concentration, no more than 60% of the portfolios assets can be based in the
same region.

Sector Concentration, no more than 35% of the portfolio can constitute one sector of property
(does not include sectors and sub sectors i.e. retail and supermarkets).

Income concentration, no more than 3.5% of the portfolios total income return can come
from one asset.

3.3 Non U.K. Assets

There are no restrictions on the acquisition of non U.K assets, if a foreign asset offers the
necessary qualities to increase the value of the portfolio they maybe acquired.

3.4 Foreign Currencies

The acquisition of non U.K. assets will require the conversion of the British pound sterling to
the proposed assets currency, the exchange rate is determined by the price set in the market.
The figure is updates weekly and can be accessed in the web based portfolio management
interface.

Any foreign currency should be valued at the converted exchange rate for the British pound
sterling at the most recent date offered in the market.

4.0 Accountancy
Foreign Currency, any cash flows and accounts must include a conversion of any foreign
currency held in the fund and account for the transaction cost of changing the currency (See
Glossary ‘Exchange Rates and Transaction Costs’).

Portfolio & Asset Valuations, the valuation process of property assets shall only be conducted
using asset Capital Growth figures, i.e. if a property is valued at £50,000,000 and the capital
growth of that asset is 3% for that year the asset will now be valued at £51,500,000. The
portfolio valuation will be the total value of all assets after they have been adjusted for capital
growth year on year.
                                      Portfolio Challenge

Fund 2: ‘European Regional Fund’

Fund Name: European Regional Fund (ERF Fund)

Fund Type: The fund is ‘Open Ended’ and is characterised as ‘value added’ (see Glossary
'Property Fund Types').

Scenario: The legal entity of the fund was created in 1997; with the first acquisition been
made shortly after in early 1998. The fund has grown in size both in terms of capital value
and the total amount assets held.

The two initial bank investors has appointed a fund management team which consisted off
fund managers from both corporations, however due to the size of the fund and in the interest
of the other partners of the fund, the management has been handed over to you the appointed
fund manager.

Fund Profile: The European Regional Fund was established initially by two large European
Banks and later a single pension fund. The fund was launched with the acquisition of 3 large
office developments two in Versailles and one in the West End of London. The two French
banks completed a 50% sale of the two Versailles office assets in 2004 and since then have
reinvested the proceeds into the fund.

The fund has grown from three large assets to a multi sector portfolio; there is a large
portfolio weighting towards the office sector, this is largely due to the influence of the initial
bank investors. It was agreed three years ago however that the portfolio would look to
diversify in terms of it asset focus, the French Bank and majority of the pension funds
believed that the portfolio could seek particular success in the regions as well as the major
cities of the UK.

The investors further agreed that they wished to pursue acquisitions of European Assets, in
particular Germany and Poland in order to bring further depth to the fund.

The Investor: The initial investors of the fund were two large European Banks and a single
pension fund belonging to a Minerals & Mining Corporation from South America. Over the
life of the fund to date the original European Bank Investors have reduced there investment
as other investors have entered the fund. The majority of the stake holders are small to
medium pension funds that have between £30 - £70 million investments in the fund.

The investors now are mostly small pensions funds (UK institutions) who invest either
directly, through a fund manager or a fund of funds. (The fund managers are those who invest
on behalf of the smaller pension funds that do not have in house investment teams).

Economic Outlook: Over the last 3 years the fund has weathered relatively well in the
difficult economic climate, the previous fund managers disposed of numerous
underperforming assets to maintain the quality of assets in the portfolio. The fund has been
handed over at a critical time, as many of the assets have been disposed off the portfolio may
have acquired the inherent risk associated with the lack of geographical and/or sector
diversification amongst its assets. The market and economy at present appears stable and
positive growth across the sectors is anticipated.

Portfolio Mandate

1. 0 Risk and Return

The fund is required to outperform the IPD’s all Pension Fund benchmark by 2% per annum.
The fund historically has strategically acquired assets associated with a core fund i.e. higher
quality buildings, better covenant rated tenants and longer lease terms. At the same time the
fund has acquired assets that offer slightly higher returns, these assets are those that have
perhaps had shorter leases, lower covenanted tenants or a re capable of some redevelopment
works in order to increase capital values and rental potential.

1.1 Tracking Error

The fund has a tracking error agreed at 1.5%. (It should be noted that in order to calculate the
tracking error with regards to portfolio returns there needs to be at least 5 years of historic
portfolio performance).

2.0 Current Stock

The portfolio has a high proportion of office and retail assets. There are currently 38
properties held in the portfolio.

The properties in the portfolio range in value from £1.2 million to larger assets circa £65
million.

2.1 Portfolio Capital value

The European Regional Fund was valued at Q4 Period 1 at £550,000,000.

2.2 Gearing

The fund has a gearing ratio of 40%, at present the fund is capable of leveraging a debt to
equity ration of £220,000,000 to £330,000,000 respectively. The fund is currently leveraged
at 20% (£110,000,000).

The fund is capable of leveraging a further £110,000,000 in order to acquire new assets. The
current rate of interest on the outstanding debt arrangement with the Universal Bank is 6%
per annum (See Glossary 'Debt Facilitation' & 'Gearing Ratios').

2.3 Asset Disposal and Acquisition Costs

Acquisition Fees, the acquisition of assets will cost 5.75% of the total asset value (See
Glossary 'Asset Acquisition Fees').
Disposal Fees, the disposal of an asset will cost 1.75% (See Glossary 'Asset Disposal Fees').

The fees apply to both U.K. and non U.K. assets.

2.4 New Investment

The fund is open ended and capable of new investment at present there is no new investment
offers.

3.0 Financial Position:

At present the fund has £110,000,000 in debt facilitation available for the purchase for further
assets. Further funding will be achieved through the disposal of underperforming assets in the
portfolio.

3.1 Financial Restrictions

Liquid Capital, it should be understood that in the terms of agreement the fund can not hold
more than 10% of its capital value in liquid assets. Portfolio valuations may have to be
conducted outside of the annual valuation periods in order to document the ratio of liquid
assets to total portfolio value.

Foreign Currency, if a foreign currency is to be held within the fund there must be a rational
why. This is because holding any alien currency to that of the dominant currency of the fund
exposes the performance of the fund to currency risk, i.e. fluxuations in currency prices may
mean a loss in liquid capital.

If it is intended that another foreign asset be acquired the appropriate currency may be held
within the fund, however a rationale must be provided as a written statement at the annual
review, including the time for which the currency was held.

Gearing, the fund is currently geared at 20%, gearing should be increased and decreased in
anticipation of market conditions and the cost of finance.

Debt Facilitation, if further debt is facilitated an account of the rational behind this decision
must be accounted for and offered in the annual performance review. Although a maximum
gearing is highlighted often funds do not facilitate the maximum amount of debt available
(see Gearing Ratios in Glossary).

3.2 Investment Memorandum Agreement (IMA)

Geographical Concentration, no more than 60% of the portfolios assets can be based in the
same region.

Sector Concentration, no more than 35% of the portfolio can constitute one sector of property
(does not include sectors and sub sectors i.e. retail and supermarkets).

Income concentration, no more than 3.5% of the portfolios total income return can come
from one asset.
3.3 Non U.K. Assets

As stated the fund wishes you to pursue the acquisition of good quality European assets to
build on the depth and diversification of the portfolio.

3.4 Foreign Currencies

The acquisition of non U.K. assets will require the conversion of the British pound sterling to
the proposed assets currency, the exchange rate is determined by the price set in the market.
The figure is updates weekly and can be accessed in the web based portfolio management
interface.

Any foreign currency should be valued at the converted exchange rate for the British pound
sterling at the most recent date offered in the market.

4.0 Accountancy

Foreign Currency, any cash flows and accounts must include a conversion of any foreign
currency held in the fund and account for the transaction cost of changing the currency (See
Glossary ‘Exchange Rates and Transaction Costs’).

Debt Facilitation, geared funds are capable of raising further finances through the further
facilitation of debt from the ‘Universal Bank’, the rate is 6%. The annual portfolio review
requires that the debt and accumulation of interest charges be recorded within the accounts.

Gearing, the fund is geared as stated above, when an asset is sold the money can either be
held as liquid capital for further acquisition or used to reduce the debt held within the fund,
this must be accounted for in the annual performance review along with a subjective
description of the rational behind the decision.

Portfolio & Asset Valuations, the valuation process of property assets shall only be conducted
using asset Capital Growth figures, i.e. if a property is valued at £50,000,000 and the capital
growth of that asset is 3% for that year the asset will now be valued at £51,500,000. The
portfolio valuation will be the total value of all assets after they have been adjusted for capital
growth year on year.
                                      Portfolio Challenge

Fund 3 – The British Retail Fund (BRF)

Fund Name: The British Retail Fund (BRF)

Fund Type: The fund is 'close ended' and characterised as a hybrid of both value added and
opportunistic (see Glossary 'Property Fund Types').

Scenario: The fund was primarily established to take advantage of the growth in the retail
sector and the globalisation of international retailers. This particular real estate fund sits as
apart of a larger pool of investments owned by a Sovereign Wealth Fund (SWF) from the
Middle East.

The fund has performed successfully over the previous years, however due to the economic
downturn and the impact on the retail sector the investors of the fund have decided to appoint
you as the fund mangers after your successful bid for their portfolio. They believe you are
capable returning the fund to its previous success and deliver the agreed returns set out in the
portfolio mandate.

Fund Profile: The fund was launched in 2004 by a sovereign wealth fund from the Middle
East; SWF’s are often a product of governments with budgetary surpluses or little to no
international debt. The fund was created to specifically take advantage of the boom in the UK
retail market; the fund had particular success in UK retail market in the economic upturn. The
fund had begun to invest in the sub sectors of retail and associated assets to increase the
diversity of the portfolio, the client believes that this is the way forward for the fund; they do
however wish to pursue the main focus of the fund which is core high street retail.

The Investor: The investor of the fund is a Sovereign Fund from the Middle East.

Economic Outlook: Over the last 3 years the fund has weathered well in the difficult
economic climate, the previous fund managers disposed of numerous underperforming assets
to maintain the quality of assets in the portfolio. The fund has been handed over at a critical
time, as many of the assets have been disposed off the portfolio may have acquired the
inherent risk associated with the lack of geographical and/or sector diversification amongst its
assets. The market and economy at present appears stable and positive growth across the
sectors is anticipated.




Portfolio Mandate

1.0 Risk and Return
The fund is looking for an internal rate of return of (IRR) (see glossary 'Internal Rate of
Return) 11% from the portfolio investment. The fund has historically focused on acquiring
properties that have disjointed cash flows associated with low covenant rated tenants and
insecurity in their cash flows which is often reflected in a lower priced asset. The fund has
historically acquired properties that are capable of been refurbished/re-developed in order to
further add capital value.

1.1 Tracking Error

There are no tacking errors or performance benchmarks in place on the fund.

2.0 Current Stock

The portfolio primarily consists of standard retail in London and the South East, with a range
of other retail focused assets including supermarkets, fashion parks, shopping centres, and
retail and distribution warehouse. There are currently 33 properties held in the portfolio.

The properties in the portfolio range in value from circa £3 million to larger assets circa £50
million.

2.1 Portfolio Capital value

The British Retail Fund was valued at Q4 Period 1 at £565,000,000.

2.2 Gearing

The fund has a gearing of 50%, at present the fund is capable of leveraging a debt to equity
ration of £282,500,000 to £282,500,000 respectively. The fund is currently leveraged at 28%
(£158,200,000).

The fund is capable of leveraging a further £124,300,000 in order to acquire new assets. The
current rate of interest on the outstanding debt arrangement with the Universal Bank id 6%
per annum (See Glossary 'Debt Facilitation' & 'Gearing Ratios').

2.3 Asset Disposal and Acquisition Costs

Acquisition Fees, the acquisition of assets will cost 5.75% of the total asset value (See
Glossary 'Asset Acquisition Fees').

Disposal Fees, the disposal of an asset will cost 1.75% (See Glossary 'Asset Disposal Fees').

The fees apply to both U.K. and non U.K. assets.

2.4 New Investment

The fund is close ended and therefore no new investment will be facilitated in the fund.

3.0 Financial Position
At present the fund has £124,300,000 in debt facilitation available for the purchase for further
assets. Further funding will be achieved through the disposal of underperforming assets in the
portfolio.

3.1 Financial Restrictions

Liquid Capital, it should be understood that in the terms of agreement the fund can not hold
more than 10% of its capital value in liquid assets. Portfolio valuations may have to be
conducted outside of the annual valuation periods in order to document the ratio of liquid
assets to total portfolio value.

Foreign Currency, if a foreign currency is to be held within the fund there must be a rational
why. This is because holding any alien currency to that of the dominant currency of the fund
exposes the performance of the fund to currency risk, i.e. fluxuations in currency prices may
mean a loss in liquid capital.

If it is intended that another foreign asset be acquired the appropriate currency may be held
within the fund, however a rationale must be provided as a written statement at the annual
review, including the time for which the currency was held.

Gearing, the fund is currently geared at 20%, gearing should be increased and decreased in
anticipation of market conditions and the cost of finance.

Debt Facilitation, if further debt is facilitated an account of the rational behind this decision
must be accounted for and offered in the annual performance review. Although a maximum
gearing is highlighted often funds do not facilitate the maximum amount of debt available
(see Gearing Ratios in Glossary).

3.2 Investment Memorandum Agreement (IMA)

Geographical Concentration, no more than 60% of the portfolios assets can be based in the
same region.

Sector Concentration, no more than 65% of the portfolio can constitute one sector of property
(does not include sectors and sub sectors i.e. retail and supermarkets).

Income concentration, no more than 3.5% of the portfolios total income return can come
from one asset.

3.3 Non U.K. Assets

There are no restrictions on the acquisition of non U.K assets, if a foreign asset offers the
necessary qualities to increase the value of the portfolio they maybe acquired.

3.4 Foreign Currencies

The acquisition of non U.K. assets will require the conversion of the British pound sterling to
the proposed assets currency, the exchange rate is determined by the price set in the market.
The figure is updates weekly and can be accessed in the web based portfolio management
interface.

Any foreign currency should be valued at the converted exchange rate for the British pound
sterling at the most recent date offered in the market.

3.5 Accountancy

Foreign Currency, any cash flows and accounts must include a conversion of any foreign
currency held in the fund and account for the transaction cost of changing the currency (See
Glossary ‘Exchange Rates and Transaction Costs’).

Debt Facilitation, geared funds are capable of raising further finances through the further
facilitation of debt from the ‘Universal Bank’, the rate is 6%. The annual portfolio review
requires that the debt and accumulation of interest charges be recorded within the accounts.

Gearing, the fund is geared as stated above, when an asset is sold the money can either be
held as liquid capital for further acquisition or used to reduce the debt held within the fund,
this must be accounted for in the annual performance review along with a subjective
description of the rational behind the decision.

Portfolio & Asset Valuations, the valuation process of property assets shall only be conducted
using asset Capital Growth figures, i.e. if a property is valued at £50,000,000 and the capital
growth of that asset is 3% for that year the asset will now be valued at £51,500,000. The
portfolio valuation will be the total value of all assets after they have been adjusted for capital
growth year on year.
                                Portfolio Challenge

Fund 4: ‘Green Heart Aspect Fund’ (GHA Fund)

Fund Name: Green Heart Aspect Fund

Fund Type: The fund is 'close ended' and characterised as opportunistic (see
Glossary 'Property Fund Types').

Scenario: You have been appointed to manage an aggressive opportunistic fund
that was launched in 2008; the fund like many funds of this nature has been
launched with the intention to take advantage of distressed and underpriced property
assets in the market. The fund is an old entity under new ownership and has recently
been refinanced; the clients have provided a portfolio capable of been developed
into an aggressive fund capable of delivering high returns.

Fund Profile: The portfolios of assets that are now under your management were
acquired from a distressed fund that was on the brink of administration before your
client purchased the total portfolio. The clients until now have concentrated on
stabilising the fund and renegotiated the finance behind the fund and have raised
liquidity through an agreement made with the 'Universal Bank'. You the fund
manager have been appointed by a consortium of private equity investors to further
develop the fund and acquire assets capable of providing excessive returns.

The Investor: The fund is solely invested in by an Irish Private Equity consortium;
the Universal Bank is currently facilitating the debt in the fund. The consortium of
investors are property developers and real estate specialists from Ireland who have
a combined experience of over 80 years of property experience. The clients have a
range of experience from multi million pound real estate developments, to complex
portfolio restructuring & re-financing instructions. The group have numerous other
joint ventures, whilst managing their own businesses and investments; they have
historically launched two smaller funds under similar circumstances so are
experienced in this type of venture. The GHA Fund is the largest they have ever
launched hence the outsourcing of its management to an experienced fund manager.

Economic Outlook: Over the last 2 years the private equity consortium has
refinanced the fund, stabilising the cash flow from the portfolio. The clients have
disposed of the assets that are not capable of providing their required rate of return,
they are aware that the portfolio may need further evaluation but believe that in its
current state it is stable enough to be handed over to you.

Many of the assets have been disposed off the portfolio may have acquired the
inherent risk associated with the lack of geographical and/or sector diversification
amongst its assets. The market and economy at present appears stable and positive
growth across the sectors is anticipated, the market at present offers assets that are
capable of providing the excessive returns outlined in the portfolio mandate.

Portfolio Mandate

1.0 Risk and Return

The fund is looking for an internal rate of return (IRR) (see glossary 'Internal Rate of
Return) of 14% from the portfolio investment. The fund has historically focused on
acquiring properties that have disjointed cash flows associated with low covenant
rated tenants and insecurity in their cash flows which is often reflected in a lower
priced asset. The fund is to be deal driven, the fund is to actively pursue assets that
are mispriced or are those often characterised with a higher risk profile, the fund is to
therefore create excessive returns via high capital growth, or income returns.

1.1 Tracking Error

There are no tacking errors or performance benchmarks in place on the fund.

2.0 Current Stock

The portfolio contains primarily of the three major assets classes, retail, offices and
industrial. The portfolio at present comprises of 24 assets, the majority of which are
based in London and the South East.

The properties in the portfolio range in value from circa £6,000,000 to larger assets
circa £84,000,000.

2.1 Portfolio Capital value

The Green Heart Aspect Fund was valued at Q4 Period 1 at £563,000,000.

2.2 Gearing

The fund has a gearing of 65%, at present the fund is capable of leveraging a debt to
equity ration of £365,950,000 to £197,050,000 respectively. The fund is currently
leveraged at 40% (£225,200,000).

The fund is capable of leveraging a further £140,750,000 in order to acquire new
assets. The current rate of interest on the outstanding debt arrangement with the
Universal Bank id 6% per annum (See Glossary 'Debt Facilitation' & 'Gearing
Ratios').

2.3 Asset Disposal and Acquisition Costs

Acquisition Fees, the acquisition of assets will cost 5.75% of the total asset value
(See Glossary 'Asset Acquisition Fees').
Disposal Fees, the disposal of an asset will cost 1.75% (See Glossary 'Asset
Disposal Fees').

The fees apply to both U.K. and non U.K. assets.

2.4 New Investment

The fund is close ended and therefore no new investment will be facilitated in the
fund.

3.0 Financial Position

The gearing at present is around 40% and has a maximum debt leverage of 60% of
the total fund. The fund has a suggested ‘fighting weight’ of 50% in good market
conditions and historically been as low as 15%. The fund managers shall raise funds
by utilising the debt facility agreed in the mandate which will be a maximising of 60%
of the total value of the portfolio. The view is that the gearing is flexible depending on
the how you perceive the market to be changing; in good times there is the facility to
take up the gearing to take advantage of the market and to reduce things when you
perceive the market to be falling.

3.1 Financial Restrictions

Liquid Capital, it should be understood that in the terms of agreement the fund can
not hold more than 10% of its capital value in liquid assets. Portfolio valuations may
have to be conducted outside of the annual valuation periods in order to document
the ratio of liquid assets to total portfolio value.

Foreign Currency, if a foreign currency is to be held within the fund there must be a
rational why. This is because holding any alien currency to that of the dominant
currency of the fund exposes the performance of the fund to currency risk, i.e.
fluxuations in currency prices may mean a loss in liquid capital.

If it is intended that another foreign asset be acquired the appropriate currency may
be held within the fund, however a rationale must be provided as a written statement
at the annual review, including the time for which the currency was held.

Gearing, the fund is currently geared at 20%, gearing should be increased and
decreased in anticipation of market conditions and the cost of finance.

Debt Facilitation, if further debt is facilitated an account of the rational behind this
decision must be accounted for and offered in the annual performance review.
Although a maximum gearing is highlighted often funds do not facilitate the
maximum amount of debt available (see Gearing Ratios in Glossary).

3.2 Investment Memorandum Agreement (IMA)
Geographical Concentration, no more than 70% of the portfolios assets can be
based in the same region.

Sector Concentration, no more than 35% of the portfolio can constitute one sector of
property (does not include sectors and sub sectors i.e. retail and supermarkets).

Income concentration, no more than 4.5% of the portfolios total income return can
come from one asset.

3.3 Non U.K. Assets

There are no restrictions on the acquisition of non U.K assets, if a foreign asset
offers the necessary qualities to increase the value of the portfolio they maybe
acquired.

3.4 Foreign Currencies

The acquisition of non U.K. assets will require the conversion of the British pound
sterling to the proposed assets currency, the exchange rate is determined by the
price set in the market. The figure is updates weekly and can be accessed in the
web based portfolio management interface.

Any foreign currency should be valued at the converted exchange rate for the British
pound sterling at the most recent date offered in the market.

4.0 Accountancy

Any cash flows and accounts must include a conversion of any foreign currency held
in the fund and account for the transaction cost of changing the currency (See
Glossary ‘Exchange Rates and Transaction Costs’).

Debt Facilitation, geared funds are capable of raising further finances through the
further facilitation of debt from the ‘Universal Bank’, the rate is 6%. The annual
portfolio review requires that the debt and accumulation of interest charges be
recorded within the accounts.

Gearing, the fund is geared as stated above, when an asset is sold the money can
either be held as liquid capital for further acquisition or used to reduce the debt held
within the fund, this must be accounted for in the annual performance review along
with a subjective description of the rational behind the decision.
6. Initial Fund Objectives and Annual Performance Review

Your role as the fund managers of is to deliver the required returns agreed by the investor(s)
within the constraints established in the fund mandate. In order to successfully manage the
portfolio the following recommendations have been made, the followings points have been
given and should be used as the initial objectives.

      Digest the information that has been given, each group has a specific fund to manage
       each of the funds has a different scenario and profile, use the glossary as reference in
       order to understand the terms that may be unfamiliar. Each of the funds have entirely
       different profiles and required rates of return, thus the management of each portfolio
       will be different as will the strategy employed by you the fund manger.

      An understanding of the fund type shall provide a basis for the strategy adopted by the
       fund managers. Comprehend the composition of the existing properties that are held
       in the portfolio.

      Identify your strategy and a plan of action of what is required of you the fund
       manager and how you will go about achieving what is set out in the mandate. A
       starting point may consider the evaluation of the current portfolio of properties with
       the assessment of the compatibility of the properties with the adopted strategy of the
       portfolio.

      Are there any individual assets that contradict the portfolio mandate, does the
       portfolio as a whole at present contradict the portfolio mandate, this will inform you
       with regards to some of the assets that need to be disposed of in the first 'sell period'

      Evaluate the current economy at the micro and macro level and their potential impact
       on the existing portfolio. Are there any particular properties that appear to be
       underperforming, or may do so in light of either the macro or micro environment.

      Specifically each property asset has different characteristics; each asset may or may
       not suit your fund strategy, for example the risk profile maybe too high or too low i.e.
       the covenant risk 1 (low) v 5 (high), likewise with planning or perhaps the property is
       not capable of redevelopment and obsolescence is low.

      You must provide a rationale for why you have acquired or disposed of any properties,
       it is intended that you illustrate a clear understanding of portfolio management. It is
       important there is clarity and rationality in your judgement, after all your performance
       will dictate the likelihood of you as fund managers retaining the client and their
       investment on review.

The Annual Performance Review
The portfolio performance shall be assessed on annual basis, you must produce written
documentation summarising the progression of the portfolio. This will include:

      For the first annual review, your account and understanding of the fund strategy
       including a brief summary of some of the issues with the portfolio on first review, this
       may include analysis of geographical weighting, sector weighting and income
       weighting (You may wish to present these in a graph or chart form).

      For the first and subsequent reviews a subjective written account of why any assets
       have been acquired or disposed is to be included, this maybe for reasons described
       above i.e. in conflict with the fund mandate and adopted fund strategy. Numerical
       evidence including calculations should also be included to reinforce the reasons for
       either acquisition or disposal.

      Evidence that there has been no breech of the following items identified in the
       portfolio mandates:

          1. Gearing Ratios (Section 2.2)

          2. Financial Restrictions (Section 3.1), including Liquid Capital & Foreign
             Currency Restrictions

          3. Investment Memorandum Agreement (IMA) (Section 3.2)

      Accountancy, a simple cash flow analysis and summary of the portfolio capital value,
       any liquid assets (including foreign currency and the appropriate exchange to pound
       sterling), a balance of outstanding debt for geared funds accounting for the accrual of
       interest over that debt.

      Portfolio Analysis, the following calculations will be completed on an annual basis
       and included in the report, further explanations of the calculations can be found in the
       glossary under 'Annual Portfolio Performance Calculations. The calculations include:

          1. Portfolio Beta

          2. Total Return for Portfolio

          3. Predicted rate of return

          4. Excess return

          5. Correlation matrix for each asset

          6. Standard Deviation on portfolio returns

          7. Sharpe Ratio
7. Explanation of Portfolio Management Terms

Explanation of Portfolio Management Terms

Property Fund Types

Property funds are usually defined by their investment style as either core, value added or
opportunity depending on its target level of return, level of leverage and risk tolerance. It
should be understood that the fund type is never completely clear cut it is these three main
factors that lead to the categorisation of a fund. It is the nature of the risk and return
relationship that often dictates the strategy of the fund and the consequent assets it will
pursue.

             Core, Low risk tolerance and lower associated returns.
             Value Added ,Low to Medium risk tolerance with appropriate returns
             Opportunistic, Higher Risk Tolerance, often with an absolute return.

According to the IPD European Funds Property Directory core funds dominate the directory
contributors, both by number and value, but over the past 3 years value added (including core
plus) and opportunity funds have come to make up the ‘lions share’ of launches.

IPD services and indices

I would recommend that you look at the IPD website, the IPD is pivotal in this area of Real
Estate and many funds that benchmark performance often use at least one of the IPD’s
indices to do so.

Portfolio Mandate

The mandate of a collect investment vehicle is a statement of its aims, the limits within which
it is supposed to invest, and the investment policy it should follow.

Where a portfolio is being managed for one client (whether an individual or an organisation)
the mandate will be set by the client. This means that clients can tailor such things as risk to
their own requirements.
A fund (or portfolio) will typically define:

      The aim of the fund (e.g., to generate dividend income or long term growth)
      The type of strategy it will follow (which will tend to follow from the above)
      What regions it will invest in (UK, Europe, emerging markets, etc.)
      What sectors it will invest in.
      What types of securities it will invest in (equities, bonds, convertibles, derivatives,
       etc.)
      Whether the fund will short sell and whether it will be hedged
      Whether it will be geared and to what extent
      A benchmark index that the fund aims to beat (or match if it is a tracker fund),
      The maximum error in tracking the benchmark.

Fund mandates are set by the fund management company, but publicised so that investors can
choose a fund that suits their requirements.                            (Source:
http://moneyterms.co.uk/fund-mandate/)

Open Ended and Closed Funds

‘Open Ended Funds’ have no limits on their size and duration and are able to raise additional
capital at any time by selling units; this does however mean that investors are able to redeem
their units through time.

‘Closed Ended Funds’ generally target a specific amount of capital to be raised and are
committed to distribute the value of the fund at the end of the fixed period.

The majority of value-added and opportunistic funds are closed rather than open ended as
they tend to require capital to be committed for a specified period to achieve their investment
plans, and cannot easily accommodate unplanned redemptions. The great majority of open
ended funds thus tend to adopt a core investment style. (Source: IPD European Property
Funds Directory 2008/2009)

Gearing
The most common use of the term 'gearing' is to describe the level of a company's net debt
(net of cash or cash equivalents) compared with its equity capital, and usually it is expressed
as a percentage. The equity in this case constitutes the property assets within the fund.

Gearing Ratios – IPD European property Fund Directory 2008/2009

All funds specify a maximum level of gearing in their prospectuses, though few actually gear
up to this limit in practice. The average level of gearing as at mid 2008 was 56.3%, with the
majority of funds by number been allowed to borrow at least 50% of their net asset values.

Core Funds in particular are tending to gear well below their limits. The actual current level
of gearing for funds in the directory (2008/2009) stands at 27.8% well below the average
permitted level. The core funds were geared at 22.4 %, while the value added and
opportunistic funds, which assume more risk, the levels are significantly higher at 36.8% and
32.1% respectively.

One of the primary issues with collapse of many real estate funds in the economic downturn
of 2007 and onwards was the over gearing of funds. The cost of debt and high leverage in
conjunction with depreciation of real estate assets often meant funds could not afford to pay
the outstanding interest and further more exceeded the debt to equity ratios agreed in the fund
mandates.

Debt Facilitation

For the purpose of this exercise all geared funds that facilitate debt will do so through the
‘Universal Bank’, the bank that will charge a flat fee of 6% at all times. For example if a fund
has a debt of £100,000,000 the equivalent of £6 million per annum will be required as an
interest payment, the payment will increase as the fund opts to leverage more debt.




Tracking Error

Tracking error is a measure of how closely a portfolio follows the index to which it is
benchmarked, in this case the IPD All property Indices. The tracking error agreed in the
portfolio mandate is the % in which the portfolios total return can deviate from the agreed
performance benchmark. The intention of the tracking error is to make sure the fund manger
performance is consistent over the total period the fund is under management, in this case 5
years.

Exchange Rates & Transaction Cots

Exchange rates adopted for currency exchange are the most recent offered in the market.

Transaction Costs are 0.5% of the total currency to be exchanged, this percentage cost is
incurred every time a currency is exchanged.

Internal Rate of Return

Internal rate of return (IRR) is a rate of return on an investment. The IRR of a project is the
discount rate that will give it a net present value of zero.

The IRR is calculated by a trial and error process

Starting with a guess at the IRR, r, the process is as follows:

    1. The NPV is calculated using discount rate r.
    2. If the NPV is close to zero then r is the IRR.
    3. If the NPV is positive r is increased.
    4. If the NPV is negative r is decreased.
   5. Go back to step 1.

   (Source: http://moneyterms.co.uk/irr/)




Net Present Value (NPV)

A present value is the value now of a stream of future cash flows, negative or positive. The
value of each cash flow needs to be adjusted for risk and the time value of money. A
discount rate is applied to adjust for risk and time value.
(Source: http://moneyterms.co.uk/npv/)

Asset Acquisition Fees

The acquisition of a property asset will cost a fixed rate of 5.75%

The fee can be broken down into the following parts:

          Stamp Duty 4%
          Legal Fees 0.5%
          Agency, Valuation, Introductory Fees, Surveying and Engineering Fees 1%
          Vat – incurred on fess and not stamp duty.

It should be understood that both disposal and acquisition fees can vary, there is always to be
done with the likes of surveyors, agents and engineers particularly in a trying market.

Asset Disposal Fees

          Legal Fees 0.5%
          Agency, Valuation, Introductory Fees, Surveying and Engineering Fees 1%
          Vat - incurred on fess

Headings from the Asset data Sheet

Sector, the property assets will fall into one of the following, standard retail, supermarket,
shopping centre, retail park, solus unit, fashion park, retail warehouse, standard office, office
park, distribution warehouse, standard industrial.




Region, the assets are located in the following areas, central London, rest of London, South
East, Eastern, East Midlands, West Midlands, Yorkshire and the Humber, North West, North
East, Scotland, Wales. Office can be further broken down into Mid Town, West End, Inner
London and rest of London. Office park is London & South v rest of UK. Distribution
Warehouse is London, Southern England and rest of UK.

Lease Lengths,
Tenant Covenant Risk (Rating Scale (1= Low, 5 = High)) is the risk associated with the
tenant and the likelihood of them defaulting on the rent and/or surrendering the lease due to
financial difficulty.

Obsolescence/Sustainability Risk (Rating Scale (1= Low, 5 = High)) relates to the state of the
building, namely the buildings life expectancy and it includes the quality of the building,
both the exterior and interior and whether the building is fit for purpose. The building is also
rated from a sustainability perspective encompassing the energy performance of the building.

Planning Risk (Rating Scale (1= Low, 5 = High)) relates to the likelihood of planning
permission been granted for either redevelopment or refurbishment, lower ratings 1 and 2
suggest that planning permission maybe likely but there may be a lengthy duration in which
the application is accepted. Higher ratings including 4 and 5 suggest that the building is either
listed or incapable of total redevelopment.

Income Return, the rental return on the property as a percentage increase or decrease on the
previous period per annum.

Capital Return, the capital growth of the property as a percentage increase or decrease on the
previous period per annum.

Total Return is of both the Income and Total Return, and considers movement in yields. The
total Return is the figure used by the IPD for their property indices.

Annual Portfolio Performance Calculations

    1. Portfolio Beta

    The beta of a portfolio is the weighted sum of the individual asset betas, according to the
    proportions of the investments in the portfolio.

    Example: if 25% of your money is in property asset A with a beta of 2.0, and 25% of your
    money is in property asset B with a beta of 1.0, and 50% of your money is held in the risk
    free asset with a beta of zero, then the portfolio beta is 1.25. (i.e. 25%x2 + 25%x1 +
    50%x0 = 1.25).

    Recall that the beta (β) of an asset or portfolio is a number describing the relation of its
    returns with that of the market as a whole. It is a measure of the volatility, or systematic
risk, of an asset or a portfolio in comparison to the market as a whole. Notes have been
provided in lectures on how to calculate beta values on a spreadsheet.

2. Total Return for Portfolio

This is the rate of return on the portfolio each year relative to the initial (purchase price)
value of the asset. Total return is composed of two elements: rental return (as a % of
initial asset value at the start of the period) plus capital growth (as a % of initial asset
value at the start of the period). These two percentages sum to give the total percentage
return.

3. Predicted rate of return

This is the rate of return on the portfolio which we would have anticipated given the risk
profile of the portfolio. If we know the beta (β) value of the portfolio (see above), the
return on the market,     , and the return on the risk free asset,   , then we can predict the
expected return on our portfolio,    :




This is the rate of return we should have achieved, all other things being equal. Note how
your expected returns compare to the actual value!

4. Excess return

This is the rate of return achieved above and beyond the rate of return available on the
risk free asset. This can be calculated by simple subtraction based on actual rate of return
achieved on the portfolio in each year. i.e.

Excess

5. Correlation matrix for each asset

The correlation matrix shows the correlation between each asset pair i and j for all
property assets held in the portfolio. The correlation values are calculated for each and
every pair based on all available historical returns for that pair of assets. Recall that
optimal diversification is achieved by holding assets which are uncorrelated or negatively
correlated. Notes have been provided in lectures on how to calculate correlation values on
a spreadsheet.
A portfolio of N assets will have a corresponding correlation matrix with N by N cells.
The diagonal cells will be empty (or =1) since this is the correlation of an assets' returns
versus its own profile. The remaining cells of the matrix will contain           correlation
coefficients.

6. Standard Deviation on portfolio returns

The standard deviation on portfolio returns,        , measures the spread of the individual
asset returns about the (weighted) mean value, which is the return on the portfolio of
assets. This is equal to the weighted average of standard deviation on each asset. For a
portfolio containing a large number of assets, this can be calculated by taking the standard
deviation of a list containing the returns on each asset held in the portfolio. Notes have
been provided in lectures on how to calculate standard deviation on a spreadsheet.

7. Sharpe Ratio

The Sharpe ratio is measure or reward-to-risk ratio on portfolio returns. The Sharpe ratio
is used to characterize how well the return of an asset compensates the investor for the
risk taken. The ratio tells us whether the returns of a portfolio are due to smart investment
decisions or a result of excess risk. The higher the Sharpe ratio the better!

The Sharpe ratio is calculated as the ratio of excess returns (numerator: see item 4 above)
to Standard Deviation on portfolio returns (denominator: see item 6 above). i.e. using the
formula:

Sharpe =

Since the Sharpe ratio is 'unit free' the Sharpe ratio on your portfolio should be compared
to the Sharpe ratio on the market portfolio. i.e.

Sharpe =
8. Project Assessment
The marks awarded to each student for the project will form a weighted part of the
overall marks for the Property Analysis and Portfolio Management Module.


Assessment Criteria


Formulation of an appropriate, robust and fully reasoned property          30
investment strategy supported by appropriate methodology.

Correct analysis and interpretation of data, appropriate application of    25
CAPM and portfolio theory calculations including beta values and the
Sharpe index.
.
Comprehensiveness, clarity and depth of analysis to support buy/ sell      15
decisions.

Critical review of the outcomes including an analysis of performance and
isolation of improvements through strategic intervention and chance.

Presentation, structure and coherence of executive summaries               5

Total                                                                      100




Please Note:

Peer Assessment will be applied if the group requests it.

				
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