Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/154844
Title: Risk-Return Behavior of Real Estate Mezzanine Investment (REMI) – The Singapore Experience.
Authors: HO, Kim Hin David 
HE, Yun Fan
Issue Date: 14-May-2019
Publisher: Emerald Publishing Ltd (UK)
Citation: HO, Kim Hin David, HE, Yun Fan (2019-05-14). Risk-Return Behavior of Real Estate Mezzanine Investment (REMI) – The Singapore Experience.. Journal of Property Investment and Finance. ScholarBank@NUS Repository.
Abstract: Abstract Purpose – REMI is a new financial instrument for Asia’s real estate market offering superior returns than those for the typical commercial bank loans. The resultant risk exposure is relatively high. In tandem with the recent and robust growth of the Singapore real estate market, there has been the fast-growing real estate investment trust (REIT) market, and the teeming emergence of private equity fund investments. Therefore, this paper is motivated to examine the REMI’s risk and total return behavior Design/methodology/approach – This paper examines the REMI structure, the measurement and characteristics of its risks and returns via a forward-looking binomial asset tree (BAT) model. Risk neutral pricing probability is adopted to construct the BAT tree. Subsequent REMI total returns (TRs) are measured by the probability weighted average returns and discussed under different scenarios Findings – REMI bears more risk than typical commercial bank loans, resulting in higher interest rates than for pure equity. Different risk issues affecting the REMI are discussed, focusing on two major sources of market uncertainty, from the financial LTV ratio risk, the real estate and capital markets risk. Research limitations/implications - The discrete-time binomial asset tree (BAT )model in association with risk neutral probabilities is estimated for the ex ante examination of the REMI. The empirical analysis involves a rigorous discrete-time forecasting of the market rent and capital value expectations of Singapore’s prime office sector, given the conditions and assumptions unique to this market. The total return (TR) for mezzanine investment is investigated under a probability-weighted average cash flow approach. Practical implications – The series of natural default probabilities is envisaged, corresponding to the respective REMI-investment interest rates. The impact of loan-to-value (LTV) ratio pertaining to the senior loan and REMI on the REMI total return is examined. When this paper looks at different LTV ratios, the results show that such a spread tends to be stable for each different LTV ratio. The spread between REMI’s original interest rate and its real total return, rises as the senior-loan LTV ratio rises. The spread also follows a “staircase shape” 3-D plot. Social implications – This paper closely looks at the REMI performance in the steady state via a rigorous approach, readily implemented with risk neutral pricing in the discrete-time BAT model. To REMI investors and public policy makers, it is essential to appreciate that when the REMI is valued, there is the need to be merely concerned with the inherent leverage, arising from the existing senior loan. The real estate and capital markets risk and the financial LTV ratio risk are the main risk factors, affecting the REMI TR. Originality/value – This paper fulfils the need to close the gap concerning the REMI structure and performance in the steady state, utilizing reliable, authoritative information and data sources. Keywords: REMI (real estate mezzanine investment); Binomial asset tree (BAT) model; Real estate and capital markets risk; Financial LTV ratio risk; bank’s senior debt; Junior debt; Equity owner; Direct real estate asset.
Source Title: Journal of Property Investment and Finance
URI: https://scholarbank.nus.edu.sg/handle/10635/154844
ISSN: 1463578X
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