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How Would You Invest $1 Billion?

How Would You Invest $1 Billion?

What do the commercial real estate industry, 15 U.S. universities and a hypothetical $15 billion have in common? The 2015 Real Confidence University Portfolio Challenge, launched on July 6, will spend a year tracking 90 college students, representing 15 colleges, to discover what the next generation of commercial real estate investors is thinking. Charles “Chuck” DiRocco, CRE, CCIM, FRICs, director of research, valuation and advisory with Altus Group, a Jersey City, N.J.-based commercial real estate consulting and advisory services firm, provides nine takeaways on the competition.

  1. How does the Real Confidence University Portfolio Challenge work? Altus Group has asked 15 participating universities how they would each allocate $1 billion in hypothetical capital among a variety of commercial real estate investments, each of which is linked to a benchmark. From this data, the University Portfolio Index (UPC Index) is being created to track the results of the competition over the next four quarters for 12 months, to July 2016. The winning university receives $50,000 in scholarship funds toward commercial real estate investment education.       Each participating university team has three to 10 members. A lot of professors were able to work it into the curriculum, while others incorporated the competition into their departments by forming clubs. At the University of San Diego, the professor made the competition one of the parts of the capstone, and broke a class of 30 to 40 students into teams and sub-teams; they presented their strategies and then the actual class voted on which portfolio presentation was best and made that portfolio their school’s entry. But at Johns Hopkins, it was added as a club—the faculty set it up and had meetings and presentations to decide which portfolio strategy to pursue.
  2. Which 15 universities are participating? Florida International University, Georgetown University, Georgia State University, Harvard University, Johns Hopkins University, Lehigh University, Middle Tennessee State University, Pennsylvania State University, Texas A&M University, Texas Christian University, College of Charleston, University of Chicago, University of Denver, University of San Diego and the University of Wisconsin.
  3. Who are the sponsors? Altus Group has partnered with NCREIF, a not-for-profit trade association that provides commercial real estate data, performance measurement, investment analysis, information standards, education and networking opportunities to the academic and investment community, and REITs advocate NAREIT.
  4. Which organizations are providing the benchmarks? Participating students can access historical benchmark information from NCREIF, NAREIT, Markit and Giliberto/Levy.
  5. What’s in it for the sponsors? The UPC Index provides perspective as to what highly-educated student investors see as top performing investments. It gives feedback on trends—what these students, a lot of whom seem to be working right now [in the industry] or are well educated regarding real estate, think is the next thing in regard to where your capital should be.
  6. What have the sponsors learned so far from the project about upcoming trends in commercial real estate investment? Everyone wants the highest return, but historically, according to the benchmarks we provided to the students. REITs’ returns have outperformed other options, so the students had to choose whether to chase the return and take on a greater risk or balance out the portfolio more. Three schools—the University of Chicago, Texas Christian University and Middle Tennessee State—decided to allocate the total $1 billion to the REIT quadrant. The latter two broke the allocation into sectors and subsectors, but the University of Chicago was pretty interesting—that team allocated $1 billion in retail REITs, and that was it. The other two schools broke their REIT allocations into health care and self-storage, and did zero in retail. It was always a different direction and strategy for the teams on the REIT side.
  7. We also had five schools with a greater allocation to private equity: Harvard University, Penn State, Georgetown University, Florida International University and University of Wisconsin. They all had a greater allocation of private equity investment than public equity. Only had seven of the 15 schools allocated capital to debt. The rest stayed away from debt, be it public or private.
  8. Where will this project lead? We’ll start the 2016 Real Confidence Portfolio Challenge in January, and from the response we’re getting, we expect a lot more schools to participate next year. This competition is the first step to our new publication, also a project of Altus Group, NAREIT and NACREIT—Real Confidence magazine. It will be an annual publication with quarterly pieces to it. It’s going to be an investor sentiment publication and we’ll ask exclusive decision-makers—REIT CEOs to portfolio managers—the same question we asked the students: How would you allocate $1 billion in commercial real estate investments? Every quarter, we’ll update the aggregate of the portfolio, so we can compare how the executives did, and we’ll have guest writers talk about the results.
  9. What's the final takeaway? These students are very educated. What we like about this is not just hearing what students have to say, which is interesting. But this also shows us where they think their investments will give them the greatest returns over the next four quarters. No one necessarily ever knows where the next best place is to put their money, so this gives some perspective in an aggregate sense. But when we have executives doing the same thing, it’ll get even more interesting. We want them to think of this competition not in regard to their job strategy, because they’re obviously commercial real estate owners and investors, but as individuals answering the question: How would you invest your money to get the best return? If you own an office REIT, it’s your mission to invest in offices. But that doesn’t mean you’re not investing in other sectors. I think once we get executives to give us that type of information, then that aggregate index is really going ot show some trends and directions.
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