Quantitative and Qualitative Measures of Real Estate Investment - Essay Example

? [REAL E INVESTMENT PERFORMANCE] [REAL E INVESTMENT PERFORMANCE] Real estate investors have adopted various qualitative and quantitative measures to gauge performance. For instance, net income return on investment, cash return on investment and other aspects such as capitalization ratios have been used to measure real estate performance (Berges, 2004, p, 86). Other real investment analysts use asset performance in the determination of real estate investment performance and in decision making (Greer & Kolbe, 2003, p, 8). According to Feng, (2010, p, 11), Internal Rate of Return and property based portfolios have also been used. The quantitative and qualitative measures of real estate investment performance are useful, but they have some limitations, in the real estate investment decision-making process. This is because of the complex nature of real estate investment. Therefore, it may be difficult to absolutely appraise performance in real estate investment. In reference to Albert Einstein’s quote, “Not everything that can be counted counts and not everything that counts can be counted," it is worthy to note that there is no precise method of performance method that includes all the important elements and leaves out elements that do not contribute to performance measurement. In measuring real estate investment performance, real estate investors and managers, as well as, analysts use methods such as Simple Pay-Back and Simple Return on Investment (ROI) models (Muldavin, 2010, p, 98). These models may be partially effective because they take into account factors such as the amount of return earned or associated with real investment. However, Simple Pay-Back and Simple Return on Investment models are essentially faulty because they fail to consider revenue or risk (Muldavin, 2010, p, 98). Given that revenue and risk play a vital role in the performance of a real estate investment, it is explicit that the models do not include all the factors that contribute to performance of an investment; therefore, not everything that counts can be counted in the use of these models, for real estate performance measurement (Muldavin, 2010, p, 98). Secondly, these financial models obtain their results, based principally on initial development costs of real estate investments and operations costs savings (Muldavin, 2010, p, 98). It is not only the initial development costs and operations costs that determine the performance level of a real estate investment. There are other factors such as risk, based on market trends, which are expected to influence the performance of an investment. These factors are left out; hence they do not count all the elements that contribute to real investment performance. With this in mind, it can then be deduced that not everything that counts can be counted. Another measure that is used in the measurement of performance of a real estate investment is the financial model for evaluating real estate investments, Discounted Cash Flow analysis (DCF) (Muldavin, 2010, p, 98). The Discounted Cash Flow analysis addresses financial implications of sustainability. It also, facilitates the integration of quantitative and qualitative analysis to measure the sustainable property's financial performance (Muldavin, 2010, p, 98). However, it should be noted that it is not only financial implications of sustainability of a real investment that counts, but also other factors that are market related, which cannot be quantified. Therefore, not all that counts can be counted. The use quantitative and qualitative methods in the measurement of performance of real estate investments involve the formulation of some financial assumptions, which are made for property. These financial assumptions pertain to performance measures such as rent, occupancies, and capitalization rates. The financial assumptions are derived, based on qualitative judgement and analysis of the best quantitative and qualitative information available in the market (Muldavin, 2010, p, 99). Unfortunately, the information in the market may be limited in availability, leading to the use incomplete information in the formulation of assumptions. This means that the assumptions made may lead to partial measurement of elements of real estate investment performance. Therefore, this means that all that counts has not been counted in the formulation of assumptions. Quantitative and qualitative measures of real estate investment performance are limited in their mode of performance appraisal. This is because it is difficult to measure the environmental or social impact of an investment in quantitative and qualitative terms (Staub-Bisang, 2012, p, 116). Absolute, relative and risk-adjusted returns are used in the measurement of real estate investment performance. Uncertainty in the market makes it difficulty to determine the measure or combination of measure that truly indicates consistent performance, which may be either superior or otherwise (Huamani & Ha, 2013). The use of absolute return may be limited in its effectiveness for asset classes that are compared against market indices. Results can be misleading, if they are not measured against relevant market indices. This is because they may be comparing different strategies. Important factors that contribute to real estate investment performance are left out; hence the quote not all that counts can be counted. Relative performance measurements of real estate investments are measures, which are based on outperformance on a passive alternative or benchmark (Huamani & Ha, 2013). These performance measurements ignore the risk component. It should be noted that risk is an important element that determines the performance of real estate investments. Additionally, these measurements do not include volatility of returns either in absolute or relative basis (Huamani & Ha, 2013). Therefore, they do not consider of all the elements, which should be considered. As a result, it can be said that not all that counts can be counted. Another limitation of real estate quantitative and qualitative performance measure is that data and information about reality of the markets are limited (Stavetski, 2009, p, 123). This leads to the formulation of dangerous assumptions. These assumptions are dynamic, complex and uncertain, and they are used to forecast unknown, future demand, risks and uncertainty (GeiBner, 2012, p, 613). It leads to the exclusion of significant real estate investment performance measure elements. Consequently, not everything that counts can be counted. In conclusion, it is imperative to note that it is extremely difficult to measure what is important, as far as real estate investments are concerned. The major determinant of any investment’s performance is risk, and measurement is a mixture of qualitative and quantitative elements (Parker, 2011, p, 227). Quantitative and qualitative performance measures are used to measure the risk of a real estate investment, relative to the risk of the market portfolio. Part of a stock’s risk originates from diversifiable sources, which are firm specific while other risks cannot be diversifiable because they are market related (Teall & Hasan, 2002, p, 111). Therefore, in real estate investment performance, measurements are expected to be incomplete, and it is difficult to identify what needs to be included. It is also imperative to note that clear definitions cannot be substituted by numbers. Real estate investment analysts pay serious attention to aspects that are measurable, leaving other elements. Therefore, not everything that can be counted counts and not everything that counts can be counted. References Berges, S. , 2004. The Complete Guide to Real Estate Finance for Investment Properties: How to. Hoboken: John Wiley and Sons Press. pp. 85-87. Feng, T., 2010, September. Property-Level Performance Attribution. Retrieved from http://dspace.mit.edu/bitstream/handle/1721.1/62050/707726118.pdf?...1 GeiBner, W. &., 2012. Quantitative Methods for Risk Management in the Real Estate Development. Journal of Property Investment and Finance , 612-630. pp. 610-614. Greer, G. E., & Kolbe, P. T., 2003. Investment Analysis for Real Estate Decisions. Chicago: Dearborn Real Estate Education Press. pp. 7-9. Huamani, M., & Ha, P., 2013. Manager Consistency Analysis: A Unique Approach to Evaluating Investment Manager Performance. Retrieved from https://www.jpmorgan.com/tss/General/Manager_Consistency_Analysis/1159321128811 Muldavin, S. R., 2010. Value Beyond Cost Savings: How to Underwrite Sustainable Properties. New York: Muldavin Company. pp. 97-100. Parker, D., 2011. Global Real Estate Investment Trusts: People, Process and Management. Chichester: Wiley-Blackwell Press. pp. 225-228. Staub-Bisang, M., (2012). Sustainable Investing for Institutional Investors : Risk, Regulations and Strategies. Hoboken: John Wiley & Sons Press. pp. 114-117. Stavetski, E. J., 2009. Managing Hedge Fund Managers Quantitative and Qualitative Performance Measures. New York: John Wiley & Sons Press. pp. 122-125. Teall, J. L., & Hasan, I., 2002. Quantitative Methods for Finance and Investments. Oxford: Blackwell Publishers. pp. 110-112. Read More