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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Bibliographic Details
Published inThe journal of real estate portfolio management Vol. 17; no. 2; pp. 75 - 88
Main Authors van der Spek, Maarten R., Hoorenman, Chris
Format Journal Article
LanguageEnglish
Published Boston American Real Estate Society 01.05.2011
Taylor & Francis Ltd
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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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ISSN:1083-5547
2691-1205
DOI:10.1080/10835547.2011.12089898