Menu
Home
Log in / Register
 
Home arrow Business & Finance arrow Property finance
< Prev   CONTENTS   Next >

CHAPTER 5. Effects of Financial Leverage on Real Estate Investments

[1]

This chapter presents the effects of financial leverage on real estate investments. As such, the chapter has three main objectives:

• to examine the impact of financing on the risk-return ratio as a function of two critical elements:

• the loan to value ratio;

• the difference between unlevered returns on investments and the debt servicing costs;

• to clarify the circumstances in which financial leveraging is appropriate;

• to provide some illustrations of the use of financial leverage.

The conduct of the analyses carried out in this chapter implies the inclusion of certain assumptions for the purpose of simplification regarding the return generating process and recourse to financial leverage.

A mono-period model has been used, as a variant of the Modigliani and Miller theorem,[2] which assumes that there are no failure costs associated with the investment:

with:

A situation involving financing with no failure costs implies that there is no correlation between the loan and total return. Consequently, the volatility of the equity return may be calculated according to the following expression:

with:

  • [1] Edited by Federico Chiavazza, MRICS, lecturer in the Administration, Control, Corporate and Real Estate Finance Area of the SDA Bocconi School of Management. He is coordinator of the Real Estate Portfolio & Asset Management and Real Estate Development executive courses. After completing a degree in Corporate Economics at Bocconi University and a period of professional activity and further research, he was awarded a Master of Science in Real Estate by New York University. He currently pursues his academic activities in parallel with his work as a professional as a Partner at Avalon Real Estate, and as an advisor for some of the major players in the real estate sector.
  • [2] See Modigliani and Miller (1958).
 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel