Leverage Please Use Responsibly
During the recent economic downturn, investors have been confronted with the negative impact of leverage. Consequently, investors now question loan-to-value (LTV) levels in their funds. Until recently, percentages around 50%–65% were common but never based on in-depth research or optimization. This...
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Published in | The journal of real estate portfolio management Vol. 17; no. 2; pp. 75 - 88 |
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Main Authors | , |
Format | Journal Article |
Language | English |
Published |
Boston
American Real Estate Society
01.05.2011
Taylor & Francis Ltd |
Subjects | |
Online Access | Get full text |
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Summary: | During the recent economic downturn, investors have been confronted with the negative impact of leverage. Consequently, investors now question loan-to-value (LTV) levels in their funds. Until recently, percentages around 50%–65% were common but never based on in-depth research or optimization. This paper examines the benefit of leverage using a simulation model to account for a multitude of scenarios and shows that portfolios with up to 40% LTV are still efficient. More leverage is likely to decrease return expectations. The reasons behind this conclusion are threefold: the disproportionately high cost of distress, asymmetric performance fees, and the impact of incremental interest rates. |
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Bibliography: | ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 |
ISSN: | 1083-5547 2691-1205 |
DOI: | 10.1080/10835547.2011.12089898 |