Leverage: Please Use Responsibly

Maarten van der Spek and Chris Hoorenman

Journal of Real Estate Portfolio Management, 2011, vol. 17, issue 2, 75-88

Abstract: Executive 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.

Date: 2011
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DOI: 10.1080/10835547.2011.12089898

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