Real Estate and Infrastructure

Real estate and infrastructure are the real assets that most portfolios hold in size, valued for income, inflation linkage and diversification. This module covers the ways to invest in property, how to value a building from its net operating income and cap rate, what makes infrastructure different, and the risks, including leverage, demand and regulation, that can turn steady-looking assets into losses.

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What you will learn

1. Describe the forms of real estate investment across private and public equity and debt, the main property types, and the features that distinguish direct real estate from other assets.

Four quadrants: private equity, public equity (REITs), private debt (mortgages), public debt (RMBS, CMBS).
Property types: residential, office, retail, industrial and logistics, hospitality and specialized assets.
Direct property is heterogeneous, indivisible, management-intensive, illiquid and appraisal-valued.
REITs add liquidity and diversification but trade with equity markets in the short run.
Non-listed REITs and open-ended funds offer redemptions at NAV only within limits.

2. Calculate the value of a property using the income approach, through direct capitalization and discounted cash flows, and describe the sales comparison and cost approaches.

NOI = rental income after vacancy + other income - operating expenses; it excludes interest, income taxes and depreciation.
Direct capitalization: value = NOI next year / cap rate; cap rate is roughly the discount rate minus growth.
DCF: discount NOI over the holding period plus a terminal value based on the next year's NOI.
Sales comparison suits frequently traded property; the cost approach suits unusual assets and caps value.
Falling NOI and rising cap rates together cause large value declines.

3. Describe the categories, development stages, revenue models and investment forms of infrastructure assets.

Economic infrastructure: transport, utilities, energy, communications. Social infrastructure: schools, hospitals, prisons.
Greenfield (to be built) carries construction risk and higher expected returns; brownfield (operating) is more income-driven.
Availability payments remove demand risk; usage-based revenue carries it; regulated assets carry regulatory risk.
Access through direct and co-investment, unlisted funds, listed companies, MLPs and PPPs.
Debt service coverage depends on the revenue model: demand shortfalls hit toll roads, not availability-based assets.

4. Explain the risk, return and diversification characteristics of real estate and infrastructure, and calculate unlevered and levered property returns.

Real estate total return = income return + capital return; core, value-add and opportunistic strategies rise in risk.
Inflation protection is partial; property values fall when real rates and cap rates rise.
Appraisal smoothing understates private real estate and infrastructure volatility and correlation.
Infrastructure: stable, often inflation-linked cash flows, but construction, demand, regulatory, political and leverage risks.
Leverage turns small changes in property value into large changes in equity returns.

Module at a glance

Real estate quadrants: private equity, public equity (REITs), private debt (mortgages) and public debt (RMBS, CMBS).
NOI excludes interest, taxes and depreciation; value = next year's NOI / cap rate, with cap rate roughly r - g.
DCF values uneven cash flows plus a terminal value based on the following year's NOI.
Sales comparison suits frequently traded property; the cost approach sets a ceiling on value.
Infrastructure: economic or social, greenfield or brownfield, paid by availability, usage, regulation or contract.
Availability payments leave demand risk with the public sector; tolls put it on investors.
Leverage, rate rises and regulation can turn apparently stable real assets into large equity losses.

This free module has 4 lessons, 12 practice questions with full explanations.

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