real estate data

7/23/2019 Real estate data

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Information on Opportunities and Risks of Various Investment Products. Risk means

the possibility of failing to achieve the expected return on an investment and/or

losing all or part of the invested capital (and for certain products even the need for

an additional contribution of capital. !uch risk may be due to a variety of causes"

depending on the speci#c structure of the product concerned. !uch causes may be

inherent in the product" the markets" or the issuer. !ince risks are not al$aysforeseeable" the follo$ing discussion must not be considered to be conclusive. In

any case" investors should pay particularly close attention to any risk related to the

credit rating of the issuer of a product" $hich al$ays depends on the individual

case. %he description of the investment products is based on the most typical

product characteristics. %he decisive factor is al$ays the speci#c structure of the

product in &uestion. 'or that reason" the follo$ing description is no substitute for a

thorough examination of the speci#c product by the investor.

redit risk. redit risk refers to the possibility of counterpart default" i.e. the inabilityof one party to a transaction to meet obligations such as dividend payments"

interest payments" repayment of principal $hen due or to meet such obligations for

full value. )lso called repayment risk or issuer*s risk. redit risks can be graded by

means of +ratings,. ) rating is scale of evaluation used to grade an issuer*s

credit$orthiness. %he rating is prepared by rating agencies" notably on the basis of

credit risk and country risk. %he rating scale ranges from +))), (best credit rating

to +-, ($orst credit rating. Interest rate risk. %he risk that losses $ill be incurred as

a result of future interest rate movements in the market. ) rise in interest rates on

the market $ill lo$er the market price of a #xedinterest bond" $hereas a fall in

such interest rates $ill raise the market price of the bond. Price risk. %he risk of

adverse movements in the value of individual investments. In the case of

contingent liability transactions (for$ard exchange deals" futures" option $riting"

etc." it is therefore necessary to provide collateral (margin re&uirement or to put

up further margin" thus tying up li&uidity. Risk of total loss. %he risk that an

investment may become completely $orthless" e.g. due to its conception as a

limited right. %otal loss can occur" in particular" $hen the issuer of a security is no

longer capable of meeting its payment obligations (insolvent" for economic or legal

reasons. 'urthermore" there is a risk of a complete loss if an issuer of securities

encounters #nancial diculties and the resolution authority responsible for the

issuer applies resolution tools" e.g. cancels the e&uity shares of shareholders or

applies the bailin tool to unsecured bonds" as a result of $hich there can be a full$ritedo$n of the nominal value of the bonds. 0

0eneral investment risks. urrency risk. In the case of transactions in foreign

currency" the return and performance of an investment depends not only on the

local yield of the security in the foreign market" but also heavily on the exchange

rate development of the respective foreign currency relative to the currency of the

investor (e.g. euro. %his means that exchange rate 1uctuations may increase or


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decrease the return and value of the investment. %ransfer risk. -epending on the

respective country involved" securities of foreign issuers pose the additional risk

that political or exchangecontrol measures may complicate or even prevent the

realisation of the investment. In addition" problems in connection $ith the

settlement of an order may occur. In the case of foreigncurrency transactions" such

measures may obstruct the free convertibility of the currency. ountry risk. %hecountry risk is the credit$orthiness of a given country. %he political or economic risk

posed by a country may have negative conse&uences for all counterparties residing

in this country. 2i&uidity risk. %radability (li&uidity refers to the possibility of buying

or selling a security or closing out a position at the current market price at any time

$hatsoever. %he market in a particular security is said to be narro$ if an average

sell order (measured by the usual trading volume causes perceptible price

1uctuations and if the order cannot be settled at all or only at a substantially lo$er

price.

3uying securities on credit. %he purchase of securities on credit poses an increased

risk. %he credit raised must be repaid irrespective of the success of the investment.

'urthermore" the credit costs reduce the return. Placing orders. 3uy or sell orders

placed $ith the bank must at least indicate the designation of the investment" the

&uantity (number of securities/ principal amount to be purchased or sold" at $hat

price the transaction should be carried out and over $hat period of time the order is

valid. Price limit. If buy or sell orders are placed $ith the instruction +at best, (no

price limit" deals $ill be executed at the best possible price. %his $ay" the capital

re&uirement or selling proceeds remain uncertain. 4ith a buy limit" the purchase

price and thus the amount of capital employed is limited. 5o purchases $ill be

made above the price limit. ) sales limit stipulates the lo$est acceptable selling

price6 no deals $ill be carried out belo$ this price limit. Important note7 ) stopmarket order $ill not be executed until the price formed on the stock reaches the

selected stop limit. Once the order has been executed" it $ill enter into e8ect as an

+at best, order" i.e. $ith no price limit. %he price actually obtained may therefore

di8er signi#cantly from the selected stop limit" especially in the case of securities on

a tight market. %ime limit. 9ou can set a time limit to determine the validity of

orders. %he period of validity of unlimited orders depends on the practices of the

respective stock market. 9our investment adviser $ill inform you of further additions

$hich can be made $hen placing an order. 0uaranty. %he term +guaranty, may

have a variety of meanings. %he #rst meaning is the commitment made by a third

party other than the issuer in order to ensure that the issuer $ill meet its liabilities.

)nother meaning is a commitment made by the issuer itself to perform a certain

action regardless of the trend in certain indicators that $ould other$ise determine

the amount of the issuer*s liability. 0uaranties may also be related to a $ide variety

of other circumstances. apital guaranties are usually enforceable only until end of

term (repayment" so that price 1uctuations (price losses are &uite possible during

the term. %he &uality of a capital guaranty depends to a signi#cant extent on the

guarantor*s credit$orthiness.


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%ax considerations. 9our investment adviser $ill provide you $ith information on the

general #scal aspects of the individual investment products. %he impact of an

investment on your personal tax bill must be evaluated together $ith a tax

consultant. Risks on stock markets" especially secondary markets (e.g." :astern

:urope" 2atin )merica" etc.. %here is no direct line of communications $ith most of

the stock exchanges on secondary markets" i.e. all the orders must be for$arded bytelephone. %his can lead to mistakes or time delays. In certain secondary stock

markets" limited buy and sell orders are generally not possible. %his means that

limited orders cannot be given until the re&uest has been made by telephone $ith

the local broker" $hich can lead to time delays. In certain cases" such limits cannot

be executed at all. In certain stock markets it is dicult to receive the current prices

on an ongoing basis" $hich makes it dicult to assess the customer*s existing

position. If a trading &uotation is discontinued on stock exchange" it may no longer

be possible to see such securities on the exchange in &uestion. ) transfer to

another stock market may also cause problems. In certain exchanges of secondary

markets" the trading hours by no means correspond to 4estern :uropean standards.

!hort trading hours of only three or four hours per day can lead to bottlenecks or

failure to process securities orders.

3onds" debentures" securitised notes. -e#nition. 3onds (; debentures" notes are

securities that obligate the issuer (; debtor" issuer to pay the bondholder (;

creditor" buyer interest on the capital invested and to repay the principal amount

according to the bond terms. 3esides such bonds in the strict sense of the term"

there are also debentures that di8er signi#cantly from the abovementioned

characteristics and the description given belo$. 4e refer the reader in particular to

the debentures described in the +!tructured Products, section. :specially in that

area" it is not the designation as a bond or debenture that is decisive for the

productspeci#c risks but rather the speci#c structure of the product. Return. %he

bond yield is composed of the interest on the capital and any di8erence bet$een

the purchase price and the price achieved upon sale/redemption of the bond.

onse&uently" the return can only be determined in advance if the bond is held until

maturity. 4ith variable interest rates" the return cannot be speci#ed in advance. 'or

the sake of comparison" an annual yield (based on the assumption of bullet

repayment is calculated in line $ith international standards. 3ond yields $hich are

signi#cantly above the generally customary level should al$ays be &uestioned" $ith

an increased credit risk being a possible reason. %he price achieved $hen selling abond prior to redemption (market price is not kno$n in advance. onse&uently" the

return may be higher or lo$er than the yield calculated initially. In addition"

transaction costs" if any" must be deducted from the overall return

redit risk. %here is al$ays the risk that the debtor is unable to pay all or part of his

obligations" e.g. in the case of the debtor*s insolvency. %he credit standing of the

debtor must therefore be considered in an investment decision. !ee the section


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+Risk of total loss, on page


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be pleased to inform you about further special bond types such as bonds $ith

$arrants" convertible bonds or >erocoupon bonds" etc.

!hares. -e#nition. !hares are securities evidencing an interest held in an enterprise

(public limited company. %he principal rights of shareholders are participating in

the company*s pro#ts as $ell as the right to vote in the shareholders* meeting.(exception7 preferred stock Return. %he yield on e&uity investments is composed of

dividend payments as $ell as price gains or losses and cannot be predicted $ith

certainty. %he dividend is the distribution of earnings to shareholders as decided at

the shareholders* meeting. %he dividend amount is expressed either as an absolute

amount per share or as a percentage of the nominal value of the stock. %he yield

obtained from the dividend in relation to the share price is called dividend yield. In

general" it is considerably lo$er than the dividend indicated as a percentage of the

nominal value. %he greater part of earnings from e&uity investments is usually

achieved from the stock*s performance or price trend (see price risk. Price risk.

!tocks are usually traded on a public exchange. )s a rule" prices are established

daily on the basis of supply and demand. Investments in stocks may lead to

considerable losses. In general" the price of a stock depends on the business trend

of the respective company as $ell as the general economic and political setting.

?oreover" irrational factors (investor sentiment" public opinion may also in1uence

the share price trend and thus the return on an investment.

redit risk. )s a shareholder" you hold an interest in a company. onse&uently" your

investments may be rendered $orthless in particular by the company*s insolvency.

2i&uidity risk. %radability may be limited in the case of shares $ith a narro$ market

(especially stocks &uoted in the unregulated market" overthecounter trade. If a

stock is &uoted in several stock exchanges" that may lead to di8erences in its

negotiability on di8erent international stock exchanges (e.g." &uotation of an

)merican stock in 'rankfurt. !tock trading. !tocks are traded on a public exchange

and sometimes overthecounter as $ell. In the case of stock exchange trading" the

relevant stock exchange rules (trading lots" order types" contract settlement" etc.

must be observed. If a share is &uoted at di8erent stock exchanges in di8erent

currencies (e.g. a @! stock &uoted in euros at the 'rankfurt !tock :xchange it also

entails an exchange rate risk. Please contact your investment adviser for further

details. 4hen purchasing a stock in a foreign exchange" please bear in mind that

foreign exchanges al$ays charge +thirdparty fees, that accrue in addition to the

bank*s usual fees. 'or the exact amount of such fees" contact your customer

adviser.

?utual funds (investment funds. )ustrian investment funds. 0eneral. erti#cates of

participation in )ustrian investment funds (investment fund certi#cates are

securities $hich evidence =oint o$nership in an investment fund. Investment funds

invest the funds provided by investors in accordance $ith the principle of risk

diversi#cation. %he three basic types of investment funds are bond funds" stock

funds as $ell as mixed funds" investing both in bonds and stocks. 'unds may invest


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in domestic and/or foreign securities. %he range of investment of domestic

investment funds includes not only securities but also money market instruments"

li&uid #nancial investments" derivative products and investment fund shares.

investment funds may invest in foreign and domestic securities. ?oreover" funds

are subdivided into investment funds ($hich pay dividends" gro$th funds ($hich do

not pay dividends" and +funds of funds,. @nlike investment funds" gro$th funds donot pay out dividends but rather reinvest them in the fund. 'unds of funds invest in

other domestic and/or foreign funds. 0uaranty funds are sub=ect to a binding

commitment by a guarantor commissioned by the fund $ith respect to distributions

of dividends for a certain period" repayment of principal" or performance. Return.

%he return on investment fund certi#cates is composed of the annual distributions

(provided they are not distributing and nonaccumulative funds and the trend in the

value of the certi#cates. It cannot be established in advance. %he trend in value

depends on the investment policy speci#ed in the fund terms" as $ell as the market

trends of the individual securities held by the fund. -epending on the composition

of a fund*s portfolio" the relevant risk $arning notices for bonds" stocks or $arrants

must be taken into account. Price or rating risk. Investment fund certi#cates can

normally be returned at any time at the repurchase price. @nder exceptional

circumstances" the repurchase of certi#cates can be temporarily suspended until

the sale of fund assets and the receipt of sales proceeds. 9our investment adviser

$ill be pleased to inform you about any fees charged and the execution date of your

buy and sell orders. %he term of an investment fund depends on the fund conditions

and is usually unlimited. Please keep in mind that investment fund certi#cates"

unlike bonds" are not normally redeemed and" conse&uently" do not carry a #xed

redemption price. %he risk of investment fund certi#cates depends" as already

mentioned" on the fund*s stated investment ob=ectives and the market trends. )

loss cannot be ruled out. )lthough investment fund certi#cates can normally bereturned at any time" they are instruments designed for investments over a

prolonged period of time.

2ike stocks" funds can be traded on exchanges. %he prices that arise on the

exchange in &uestion may di8er from the redemption price. In that regard please

see the information on risks related to stocks. %ax considerations. %he #scal

treatment of investment fund distributions varies according to the type of

investment fund. 'oreign investment companies. 'oreign investment companies are

governed by separate legal provisions" $hich may substantially di8er from those

applicable in )ustria. In particular" stipulations on supervision are often less severe

than in )ustria. Outside )ustria" there are also closedend funds and funds ruled by

corporate la$" $hose prices are regulated by supply and demand rather than the

intrinsic value of the fund" $hich is roughly comparable to the establishment of

stock prices. Regardless of their legal form" the dividends and return distributed by

foreign investment companies (e.g. nondistributing funds" the earnings e&uivalent

to distribution payments are sub=ect to other #scal stipulations. :xchange %raded

'unds. :xchange %raded 'unds (:%'s are fund shares that are traded like e&uities


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on a stock exchange. )n :%' generally forms a basket of securities (e.g." a basket of

stocks that re1ects the composition of an index" i.e. that tracks the index in one

certi#cate by means of the securities contained in the index and their current

$eighting" so that :%'s are often referred to as +index stocks,. Return. %he return

depends on the price trend of the underlying securities in the securities basket.

Risk. %he risk depends on the underlying securities in the security basket.

Realestate funds. 0eneral. )ustrian property funds are special funds o$ned by an

investment trust that holds and manages the special fund in trust on behalf of the

shareholders. %he unit certi#cates represent a contractual claim to share in the

pro#ts of the special fund. Property funds invest the funds received from the

shareholders according to the principle of risk diversi#cation" especially in land"

building" shares in property companies" and similar property holdings" as $ell as its

o$n construction pro=ects6 they also hold li&uid #nancial investments (investments

in li&uid assets" such as securities and bank deposits. %he li&uid investments serveto secure the property fund*s outstanding payment obligations (e.g." due to

purchase of real estate and repurchase of unit certi#cates. Return. %he total return

of property funds from the shareholder*s point of vie$ consists of the annual

dividends (to the extent that the funds distribute dividends instead of reinvesting

them and the price trend of the calculated share value of the fund. %he amount of

return cannot be determined in advance. %he property fund*s performance depends

on the investment policy established in the fund regulations" the market trend" the

speci#c properties held by the fund" and the other fund components (securities"

bank balances. %he historic performance of a property fund is not indicative of its

future performance. Property funds are exposed to the risk of reduced return due to

vacancies in the buildings" among other things. Particularly in the case of the fund*s

o$n construction pro=ects" there may be problems $ith initial rental. Vacancies may

have a negative impact on the value of the property fund and lead to reduced

dividends. Investing in property funds may also lead to a partial loss of the invested

capital. Property funds also invest li&uid funds and cash in banks in other forms of

investment" especially interestbearing securities. %hat portion of the fund assets is

therefore sub=ect to speci#c risks applicable to the selected form of investment.

4hen property funds invest in foreign pro=ects outside the euro>one" the

shareholder is also exposed to currency risks" since the market value and return

from such foreign property are converted to euros $hen calculating the price of

issue or redemption of the unit certi#cates.

Price or Valuation Risk. @nit certi#cates may usually be given back for the

redemption price at any time. Please bear in mind that in the case of property

funds" the redemption of unit certi#cates may be sub=ect to restrictions. @nder

exceptional circumstances" redemption may be temporarily postponed until the

underlying assets of the property fund have been sold and the proceeds from the

sale have been received. In particular" the fund regulations may stipulate that


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follo$ing the restitution of a large number of unit certi#cates" redemption may be

postponed for a lengthy period of up to t$o years. In such cases" the fund cannot

disburse the redemption price during that period $ill not be possible. Property funds

are typically classi#ed as longterm investment pro=ects.

4arrants. -e#nition. 4arrants are securities $ithout interest and dividendsattached" granting the o$ner the right to buy (call $arrants or sell (put $arrants a

certain underlying asset (e.g. shares at a previously #xed price (exercise price at a

particular point in time or during a particular period of time. Return. %he buyer of a

call $arrant has secured the purchase price of the underlying asset. ) return can be

obtained if the market price of the underlying asset exceeds the stipulated exercise

price to the paid by the investor. %he $arrant holder may then buy the underlying

instrument at the strike price and sell it immediately at the ruling market price. )n

increase in the price of the underlying asset $ill usually lead to a proportionately

higher percentage increase in the $arrant price (leverage e8ect. onse&uently"

most $arrant holders achieve a return through selling $arrants. %he same applies"

in the opposite direction" to put $arrants. %hey usually rise in value if the price of

the underlying asset decreases. %he return on $arrant transactions cannot be

established in advance. %he maximum loss is limited to the amount of capital

invested. Price risk. %he risk inherent in $arrant transactions is the possibility that"

bet$een purchase and expiration of the $arrant" the underlying asset develops

di8erently than expected at the time of purchase. In the $orst case" the entire

capital invested may be lost. %he price of a $arrant also depends on other factors"

the most important of $hich are7 Volatility of the underlying asset (a measure of

the 1uctuation margin anticipated at the time of purchase and" simultaneously" the

most important input for determining the fairness of the $arrant price. Aigh

volatility generally implies a higher price for the $arrant. Remaining time tomaturity (the longer the maturity of a $arrant" the higher the price

) decrease of volatility or diminishing time to maturity may cause the price of a

$arrant to remain unchanged or fall even though the expectations in respect of

the price trend of the underlying asset are met. 4e generally advise against the

purchase of $arrants $hich are close to expiry. 3uying $arrants $ith high volatility

makes your investment more expensive and is therefore highly speculative.

2i&uidity risk. 4arrants are usually issued only in small &uantities" $hich increases

the li&uidity risk for investors. 3ecause of this" individual $arrants may be sub=ect to

particularly heavy price 1uctuations. 4arrant trading. 4arrants are largely traded

over the counter (O%. ) gap generally exists bet$een the purchase price andselling price. %his di8erence is for your account. 4ith respect to stock exchange

trading" it is important to remember that the market fre&uently has very lo$

li&uidity. 4arrant terms. 4arrants do not have standardised terms. It is therefore

imperative to obtain full information on the exact terms and conditions of a $arrant"

in particular7 !tyle of exercise7 Is the $arrant exercisable at any time during its life

()merican option or only at expiry (:uropean optionB !ubscription ratio7 Ao$


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many $arrants are needed to obtain the underlying assetB :xercise7 -elivery of the

underlying asset or cash settlementB :xpiry7 4hen does the option right expireB

Please note that your bank $ill not exercise a $arrant unless speci#cally instructed

to do soC 2ast trading day7 %his date is often a bit earlier than the expiry date" so

that it cannot be taken for granted that the option can be sold at any time up to the

expiry date.

!tructured products. +!tructured investment instruments, are investment

instruments for $hich the return and/or repayment of capital are not generally #xed

but rather depend on certain future events or developments. ?oreover" such

investment instruments may be structured in such a $ay that the issuer may call

them in early if the product reaches the target value6 in such cases" they be even be

called in automatically. %his section $ill describe the individual product types. 4e

$ill use generic terms to refer to these product types" but those terms are not used

uniformly on the market. -ue to the many possibilities of linking" combining and

disbursement related to such investment instruments" they have developed a $ide

variety of di8erent structures $hose selected names do not al$ays follo$ the

structures uniformly. 'or that reason" it is al$ays necessary to examine the speci#c

terms and conditions of the product. 9our customer adviser $ill be happy to inform

you of the various structures of such investment instruments. Risks. D 4hen the

terms provide for payments of interest and/or dividends" such payments may

depend on future events or developments (indexes" baskets" individual stocks"

certain prices" commodities" precious metals" etc. and may therefore be reduced or

even eliminated in the future. E Repayments of principal may depend on future

events or developments (indexes" baskets" individual stocks" certain prices"

commodities" precious metals" etc. and may therefore be reduced or even

eliminated in the future. F 4ith respect to payments of interest and/or dividends as$ell as repayments of principal" it is necessary to take into account interest risk"

currency risk" corporate risk" sector risk" country risk and credit risk (and possibly a

lack of secured creditor rights and no claim for separation and recovery of assets

not belonging to the bankrupt estate as $ell as tax risks.


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agrees to accept the conse&uences if the share price changes in a direction that is

contrary to his interests. %he bond purchaser thus bears the risk of the price trend6

in exchange" he receives a premium" the amount of $hich basically depends on the

volatility of the underlying stock. If the bond is not held to maturity" that risk is

compounded by interest rate risk. ) change in the interest rate $ill a8ect the bond*s

price and thus the bond*s net yield relative to its maturity. Please also see thecorresponding risk noti#cation in the sections on credit risk" interest rate risk" and

price risk of shares. Interest !pread !ecurities Products (onstant ?aturity !$aps.

%hese products" $hich are structured like debt securities" initially feature a #xed

coupon. )fter the #xedinterest phase" the products are converted to a variable

interest rate. %he coupon" $hich is generally annual" depends on the current

interest situation (e.g." the interest curve. In addition" such products may involve

target interest rate variant6 i.e. if a predetermined target interest rate is achieved"

the product $ill be called in early. Return. In the #xedinterest phase" the investor

generally obtains a higher coupon than $ith conventional bonds on the market. In

the variableinterest phase" investors have the opportunity of achieving higher

coupons than from #xedinterest bonds. Risk. 3efore maturity" marketrelated price

1uctuations may occur. !uch 1uctuations may prove signi#cant" depending on the

interest rate trend. 0uaranty certi#cates. 4hen guaranty certi#cates reach

maturity" they pay out the initial face value or a certain percentage thereof

regardless of the performance of the underlying security (+minimum redemption,.

Return. %he maximum return obtainable from the performance of the underlying

security may be limited by a maximum redemption price or other restrictions on

participation in the performance of the underlying security established in the terms

and conditions of the certi#cate. %he investor is not entitled to dividends and similar

distributions on the underlying security. Risk. %he value of the certi#cate before

maturity may fall belo$ the agreed minimum redemption price before maturity. )tmaturity" the value $ill generally be at the level of the minimum redemption price"

ho$ever. %he minimum redemption price depends on the issuer*s credit$orthiness.

-iscount certi#cates. In the case of discount certi#cates" the investor receives the

underlying security (e.g." the underlying stock or index at a discount o8 the current

price (safety bu8er but in exchange his interest in the gro$th of the underlying

security is limited to a certain ceiling (cap or reference price. )t maturity" the

issuer has the option of either redeeming the certi#cate at the maximum value

(cap or delivering stocks or" if an index is used as the underlying security" a cashsettlement e&ual to the index value. Return. %he di8erence bet$een the discounted

purchase price of the underlying security and the price ceiling determined by the

cap represents the possible return. Risk. If the price of the underlying security falls

sharply" shares $ill be delivered $hen the instrument reaches maturity (the

e&uivalent value of the delivered shares $ill be belo$ the purchase price at that

time. !ince allocation of shares is possible" it is necessary to take into account the


11/38

risk noti#cation for shares. 3onus certi#cates. 3onus certi#cates are debt securities

that" sub=ect to certain re&uirements" pay out at maturity a bonus or appreciated

price of an underlying security (individual shares or indexes in addition to the

nominal value. 3onus certi#cates have a #xed maturity. %he terms and conditions of

the certi#cate regularly stipulate the payment of cash or delivery of the underlying

security at maturity. %he type and price of redemption at maturity depend on theprice performance of the underlying security. %hree levels are set for a bonus

certi#cate7 a starting level" a barrier underneath the starting level" and a bonus

level above the starting level. If the underlying security falls do$n to the barrier or

belo$" the bonus is forfeited and the certi#cate $ill be redeemed at the price of the

underlying security. Other$ise" the minimum redemption price results from the

bonus level. 4hen the certi#cate reaches maturity" the bonus is paid out along $ith

the amount initially paid for the face value of the certi#cate. Return. 4ith a bonus

certi#cate" the investor ac&uires a money claim against the issuer for payment of an

amount determined by the performance of the underlying security. %he return

depends on the performance of the underlying security. Risk. %he risk depends on

the underlying security. If the issuer goes bankrupt" the investor has no secured

creditor rights or claim for separation and recovery of assets not belonging to the

bankrupt estate $ith respect to the underlying security

Index certi#cates. Index certi#cates are debt instruments (usually publicly &uoted

that o8er investors the possibility of ac&uiring an interest in a certain index $ithout

having to o$n the securities contained in the index. %he underlying index is

generally represented on a D7D basis6 changes in the relevant index are taken into

account. Return. 4ith an index certi#cate" the investor ac&uires a money claim

against the issuer for payment of an amount that depends on the level of the

underlying index. %he return depends on the performance of the underlying index.Risk. %he risk depends on the securities underlying the index. If the issuer goes

bankrupt" the investor has no secured creditor rights or claim for separation and

recovery of assets not belonging to the bankrupt estate $ith respect to the

underlying security. 3asket certi#cates. 3asket certi#cates are debt instruments that

o8er investors the opportunity to ac&uire an interest in the performance of a certain

securities basket $ithout having to o$n the securities contained in the basket. %he

composition of the underlying basket is up to the issuer. %he various securities in

the basket may be $eighted e&ually or di8erently. %he composition may be ad=usted

at speci#ed times (e.g." annually. Gnockout certi#cates (%urbo certi#cates. %he

term +knockoutcerti#cate, means a certi#cate that evidences the right to buy or

sell a certain underlying security at a certain price if the underlying security fails to

reach the speci#ed price threshold (knockout threshold before maturity. If it does

reach the threshold level" the certi#cate $ill expire early and most of the

investment $ill generally be lost. -epending on the price trend of the underlying

security" a distinction is made bet$een knockout long certi#cates" $hich bank on a

bull market" and knockout short certi#cates" $hich are especially designed for bear

markets. 3esides normal knockoutcerti#cates" +leveraged, knockout certi#cates


12/38

are issued" usually under the name of +turbo certi#cates, (or leverage certi#cates.

4hen the price of the underlying security rises" the increase in the value of the

turbo certi#cates $ill be disproportionately greater due to the lever (turbo e8ect6

the same e8ect occurs in the opposite direction $hen prices fall" ho$ever. %hus"

high gains can be earned through small investments" but the risk of loss is

increased" as $ell.

Return. ) positive return can be earned if there is a favourable di8erence bet$een

the ac&uisition price or market price and the exercise price (making it possible to

buy the underlying security at the lo$er exercise price or to sell it at the higher

exercise price. Risk. If the knockout threshold is reached before maturity" either

the certi#cate expires and becomes $orthless or an estimated residual value is paid

out (the product is +knocked out,. In the case of certain issuers" it suces to knock

out the certi#cate if the price reaches the knockout level during the trading day

(intraday. %he closer the current stock market &uotation is to the exercise price" the

stronger the leverage e8ect. )t the same time" ho$ever" the risk increases that the

price $ill fall belo$ the knockout threshold and either the certi#cate $ill become

$orthless or the estimated residual value $ill be paid out. !pread certi#cates.

!pread certi#cates o8er investors the possibility of sharing disproportionately in the

performance of the underlying security in expectation of a share price or index

varying $ithin a certain price range (spread de#ned by a starting point and a

stopping point. Return. ) return can result from the share that is disproportionate to

the performance of the underlying security. Risk. If the #nal price established on the

value date is belo$ the starting point" the certi#cate $ill merely represent the price

performance of the underlying security. If the price falls belo$ the stopping point"

the investor receives a #xed maximum redemption price at maturity $ith no right to

share in the price increase. %$in 4in certi#cates. 4hen %$in 4in certi#cates reachmaturity" the issuer pays out a redemption price that depends on the performance

of the underlying instrument. %he certi#cates have a barrier. If the price does not

reach or falls belo$ the barrier of the %$in 4in certi#cate before it matures" the

investor shares in the absolute performance of the underlying instrument starting

from the base price set by the issuer6 this means that even price losses of the

underlying instrument may translate into gains on the certi#cates. If the price

reaches or falls belo$ the barrier of the %$in 4in certi#cate before maturity" the

certi#cate $ill be redeemed at a price at least e&ual to the current price trend of the

underlying instrument. %he issuer may stipulate that disproportionate sharing in the

performance of the underlying instrument is possible above the base price. %here

may be a limit on the maximum redemption price" ho$ever.

Return. If the price does not reach the barrier" the investor may also pro#t from the

negative performance of the underlying instrument" since he shares in the absolute

performance6 price losses in the underlying instrument may therefore translate into

gains. %he certi#cate may react more or less strongly to the price 1uctuations of the

underlying instrument depending on various in1uencing factors (e.g." volatility of


13/38

the underlying instrument" time to maturity" distance of the underlying instrument

from the barrier. Risk. %$in 4in certi#cates are risky investment instruments. If the

price of the securities underlying the %$in 4in certi#cate changes unfavourably" all

or much of the invested capital may be lost. :xpress certi#cates. )n express

certi#cate lets the investor share in the performance of the underlying instrument

$ith the option of early redemption. If on one of the determination dates theunderlying instrument satis#es the trigger criterion speci#ed by the issuer" the

certi#cate expires early and $ill be automatically redeemed by the issuer at the

redemption price applicable on the determination date in &uestion. If the underlying

instrument does not satisfy the speci#ed trigger criterion even on the #nal

determination date" the certi#cate $ill be redeemed at the closing price of the

security underlying the certi#cate established at maturity or on the #nal

determination date. In that case" if the issuer set a barrier at the start of the issue of

the certi#cate and the price of the underlying instrument neither reaches nor breaks

through the barrier during the observation period" the certi#cate $ill be redeemed

at a price at least e&ual to the minimum redemption price de#ned by the issuer.

Return. :xpress certi#cates o8er the possibility of early realisation of the positive

performance of the underlying instruments. :ven if the speci#ed trigger criterion is

not satis#ed" there may be a payout of the minimum redemption price" if the barrier

has not been reached or broken through. %he certi#cate may react more or less

strongly to the price 1uctuations of the underlying instrument depending on various

in1uencing factors (e.g." volatility of the underlying instrument" time to maturity"

distance of the underlying instrument from the barrier. Risk. :xpress certi#cates

are risky investment instruments. If the price of the securities underlying the

:xpress certi#cate changes unfavourably" all or much of the invested capital may

be lost.

Aedge funds. (Aedge funds" hedge funds of funds" hedge fund index certi#cates"

and other products $ith hedge strategies as the underlying investment 0eneral

information. Aedge funds are funds that are sub=ect to fe$ or no restrictions of a

statutory or other nature $ith respect to the principles of investment. %hey

endeavour to use all forms of investment to increase their capital through

alternative" sometimes nontransparent investment strategies. :xamples of

investment strategies7 2ong/!hort7 @ndervalued securities are bought and

overvalued securities are simultaneously sold short. :vent-riven7 %he ob=ective is

to take advantage of speci#c corporate events such as mergers" ac&uisitions"reorganisation or bankruptcy. 0lobal ?acro7 %his style attempts to use

macroeconomic analysis of ma=or economic and political trends in order to identify

and exploit market ineciencies. Aedge funds of funds are funds that invest in

individual hedge funds. Aedge fund index certi#cates are debt securities $hose

price and performance trend depend on the average trend of several hedge funds

that are combined into a single index to provide a basis of calculation. Aedge funds


14/38

of funds and hedge fund index certi#cates o8er investors the advantage of

improved risk diversi#cation. Return and risk components. Aedge funds o8er an

opportunity for very high returns" but the risk of losing your invested capital is

correspondingly high. %he price trend of hedge fund products is especially

in1uenced by the follo$ing factors" $hich generate opportunities and risks7 Aedge

funds trends tend to be independent from international stock and bond markettrends6 depending on the hedge fund strategy the general market trend may either

be exaggerated or result in a pronounced trend in the opposite direction. Aedge

fund trends are particularly in1uenced by their market share.

-ue to their components" hedge fund assets may be highly volatile" $hich means

that the share prices may be sub=ect to signi#cant up$ard and do$n$ard

1uctuations $ithin short periods of time. In extreme cases" unsecured hedge fund

products may lead to a total loss. oncentrating on =ust one strategy or only a fe$

exacerbates the riskH that risk may be reduced through diversi#cation in the case of

hedge funds of funds or hedge fund index certi#cates. %he manager of the fund of

funds selects the individual funds and their composition in keeping $ith the fund*s

desired risk/ return pro#le or according to a system of distribution among various

countries and sectors determined by an index committee. It is impossible for the

underlying hedge funds to be transparent at all times to the fund of fund

management or the index committee. 2i&uidity risk. !ince hedge funds re&uire

complex strategies and are dicult to manage" it takes longer to determine the

price of a hedge fund product than $ith traditional funds. Aedge fund products are

therefore less li&uid than traditional funds. %he prices are generally determined on a

monthly rather than daily basis" so that shares can fre&uently be redeemed only

once a month. %o be able to return the shares at the time" the investor must give an

irrevocable declaration of intent to return his shares $ell in advance of theredemption date. %he share price may change signi#cantly bet$een the time of the

declaration of intent to return the shares and the time of redemption" but the

investor does not have the right to such price changes since his declaration of

intent is irrevocable. %he speci#c terms of redemption depend on the individual

product. %he limited li&uidity of the individual funds and instruments can therefore

decrease the negotiability of hedge fund product.

?oney market instruments. -e#nition. ?oneymarket instruments include

certi#cated money market investments and borro$ings such as certi#cates of

deposit (-s" cash deposit certi#cates" global note facilities" commercial paper as

$ell as all notes $ith a maturity of up to #ve years for the repayment of principaland #xed interest rates for up to one year. ?oney market transactions also include

genuine repurchase transactions and agreements. Return and risk component. %he

return and risk components of money market instruments are largely e&uivalent to

those of bonds/debentures/notes. -i8erences relate mainly to the li&uidity risk.

2i&uidity risk. )s a rule" there are no organised secondary markets for money

market instruments. onse&uently" it cannot be guaranteed that the instruments


15/38

can be sold readily 2i&uidity risk becomes of secondary importance if the issuer

guarantees payment of the invested capital at any time and is suciently

credit$orthy to do so.

?oney market instruments H explained clearly. erti#cates of -eposit7 ?oney

market securities issued by banks" generally $ith a maturity of F to FJ days.Public notes7 ?oney market securities issued by banks" generally $ith a maturity up

to #ve years. ommercial Paper7 ?oney market securities" shortterm notes issued

by ma=or corporations" generally $ith a maturity of #ve to EK days. 0lobal 5ote

'acility7 ) variation on the commercial paper facility that enables the issuing of

commercial paper simultaneously in the @!) and on markets in :urope. 5otes7

!hortterm capital market instruments" generally $ith a maturity of one to #ve

years.

:xchangetraded futures contracts in securities (options and futures contracts.

4hen trading in options and futures" the high chances of gain are counterbalanced

by high chances of loss. )s your bank" $e believe it is our duty to inform you of the

risks of options or futures contracts before you make such transactions. Purchase of

options. %his means the purchase (opening ; purchase for opening" long position of

calls (options to buy or puts (options to sell" $hich entitles you to demand delivery

or acceptance of the underlying security or" if that is impossible" as in the case of

index options" you are entitled to demand payment of an amount of cash e&ual to

the positive di8erence bet$een the price of the underlying security at the time of

purchase of the option and the market price at the time of exercise of the option. In

the case of )mericantype options" the option may be exercised at any time before

the agreed expiration date6 in the case of :uropeantype options" they can beexercised only on the agreed expiration date. In exchange for the grant of the

option" you pay the option price (option premium. If the price changes in the

opposite direction from $hat you hoped $hen you bought the option" your option

may lose all its value by the expiration date. 9our risk of loss is therefore the price

you paid for the option. !ale of options contracts and purchase or sale of futures

contracts . !ale of alls. %his means the sale (opening ; sale for opening" short

position of a call (option to buy" by $hich you assume the obligation of delivering

the underlying security at a speci#ed priced at any time before the expiration date

(in the case of )mericantype call options or on the expiration date (in the case of

:uropeantype call options. In exchange for assuming that obligation" you receivethe option price. If the price of the underlying security rises" you must accept the

risk of delivering the underlying security at the agreed price even if the market

price is signi#cantly higher than that price. %hat price di8erence constitutes your

risk of loss" $hich cannot be determined in advance and in principle is unlimited. If

the underlying securities are not in your possession (uncovered short position" you

$ill have to purchase them through a cash transaction (replacement transaction

and your risk of loss in that case cannot be determined in advance. If the underlying


16/38

securities are in your possession" you are protected against replacement losses and

$ill also be able to make timely delivery. !ince such securities must be kept blocked

until the expiration date of your option transaction" ho$ever" you $ill not be able to

dispose of them during that time" $hich means you cannot sell them to protect

yourself against falling prices.

!ale of Puts. %his refers to the sale (opening ; sale for opening" short position of a

put (short position" by $hich you assume the obligation of purchasing the

underlying security at a speci#ed price at any time before the expiration date (in

the case of )mericantype call options or on the expiration date (in the case of

:uropeantype call options. In exchange for assuming that obligation" you receive

the option price. If the price of the underlying security falls" you must accept the

risk of buying the underlying security at the agreed price even if the market price is

signi#cantly lo$er than that price. %hat price di8erence" $hich is calculated on the

basis of the exercise price minus the option premium" constitutes your risk of loss"$hich cannot be determined in advance and is in principle unlimited. )n immediate

sale of the securities $ill be possible only at a loss. If you do not $ish to sell the

securities immediately" ho$ever" and $ant to retain possession of them" you $ill

have to pay the amount necessary to do so. !ale or purchase of futures contracts.

%his refers to the purchase of sale of futures" by $hich you assume the obligation to

accept or deliver the underlying value at the speci#ed price at the end of the

agreed term. If prices rise" you must accept the risk of having to deliver the

underlying securities at the agreed price" even if the market price is signi#cantly

higher than that price. If prices fall" you $ill have to accept the risk of purchasing

the underlying securities at the agreed price even if the market price is considerably

lo$er. %hat price di8erence constitutes your risk of loss. In the case of an obligation

to purchase" you must have all the necessary cash available at maturity. If the

underlying securities are not in your possession (uncovered short position" you $ill

have to purchase them through a cash transaction (replacement transaction and

your risk of loss in that case cannot be determined in advance. If the underlying

securities are in your possession" you are protected against replacement losses and

$ill also be able to make timely delivery.

ash settlement transactions. If delivery or acceptance of the underlying securities

is not possible in a futures transaction (e.g." in the case of index options or index

futures" you $ill be re&uired to pay a cash amount (cash settlement if the marketdid not move in the direction you anticipated. %he amount of that di8erence can be

calculated from the di8erence bet$een the price of the underlying security at the

time you signed the option or futures contract and the market price at the time of

exercise or maturity. %hat constitutes your risk of loss" $hich cannot be determined

in advance and is in principle unlimited. In that case" you must ensure that you

have sucient li&uid assets to cover the transaction. Posting of security (?argins.

In the case of uncovered sale of options (opening ; sale for opening" uncovered


17/38

short position or the purchase or sale of futures (future transactions" it is

necessary to post security in the form of a +margin,. 9ou are re&uired to post such

security at the time of opening and $henever needed (if the price moves contrary

to your expectations at any time before the expiration of the option or futures

contract. If you are not capable of posting the additional security that is re&uired"

$e $ill unfortunately be forced to close out your position immediately and use thehitherto posted security to cover the transaction (see section L(D of the +!pecial

%erms and onditions for Options and 'utures %ransactions traded on the !tock

:xchange or Over the ounter,

2i&uidation of Positions. 4hen trading in )mericantype options and futures

contracts" you have the possibility of li&uidating your position before the expiration

date (closing. 9ou cannot al$ays be sure that that $ill be possible at any time"

ho$ever. It al$ays depends very strongly on the market situation6 in a dicult

market" you may have to perform trades at an unfavourable market price" so that

losses may be incurred. Other Risks. Options entail both rights and obligations H

futures contracts entail obligations only H $ith a short maturity and predetermined

expiration or delivery dates. 'or those reasons" and because of the rapidity of such

transactions" the follo$ing additional risks are created" in particular7 Options that

are not exercised in a timely manner $ill expire and become $orthless. If you are

unable to post the re&uired additional security in a timely manner" $e $ill li&uidate

your position and dra$ upon your previously posted security" $ithout pre=udice to

your obligation to cover the outstanding balance. In the case of option

transactions (short position" $e $ill perform the necessary steps for you $ithout

prior information in the event of allotment. 4e $ill sell securities allotted through

the exercise of a put if there is insucient cover. If you perform futures

transactions in foreign currency" an unfavourable trend in the foreign exchangemarket may increase your risk of loss.

'oreign currency futures. -e#nition. ) foreign currency future is the #rm

undertaking to buy or to sell a certain foreign currency amount at a speci#ed date in

the future or over a speci#ed period of time at a price agreed upon conclusion of the

contract. %he delivery or receipt of the counter currency is made pursuant to the

same value date. Return. %he return (pro#t/loss achieved by speculative investors

is the di8erence bet$een the currency rates during or at the end of the maturity of

the for$ard deal in line $ith the contract speci#cations. %he use of currency

for$ards for hedging purposes means locking in an exchange rate so that the costs

of the hedged transaction as $ell as its return $ill neither increase nor decrease asa result of any exchange rate 1uctuations. urrency risk. %he currency risk inherent

in foreign currency futures is" in the case of hedging transactions" the possibility

that the buyer/seller could buy/sell the foreign currency at a more favourable price

during or at the end of the maturity or" in the case of unmatched positions" the

possibility that the buyer/seller must buy/sell the currency at a less favourable

price. %he potential loss may substantially exceed the original contract value.


18/38

redit risk. %he credit risk in connection $ith currency for$ards derives from the

possibility of counterparty default due to insolvency" i.e. one party*s temporary or

permanent inability to complete the for$ardexchange deal" making more expensive

covering transactions in the market necessary. %ransfer risk. %he transfer of some

foreign currencies may be restricted" in particular as a result of exchangecontrol

regulations in the country issuing that currency. %he orderly execution of thefor$ardexchange transaction $ould then be at risk.

'oreign currency s$aps. -e#nition. ) transaction in $hich speci#ed amounts of one

currency are exchanged for another currency over a certain period of time. %he

interest rate di8erential bet$een the t$o currencies is re1ected in a

premium/discount to the reexchange price. %he delivery or receipt of the counter

currency is made pursuant to the same value date. Return. %he return (pro#t/loss

for anyone trading in foreign currency s$aps results from the positive or negative

development of the interest rate di8erential and can be made in the case of a

countertrade during the maturity of the foreign currency s$ap.

redit risk. %he credit risk in connection $ith foreign currency s$aps derives from

the possibility of counterpart default due to insolvency" i.e. one party*s temporary or

permanent inability to complete the foreign currency s$ap" making more expensive

covering transactions in the market necessary. %ransfer risk. %he transfer of some

foreign currencies may be restricted" in particular as a result of exchangecontrol

regulations in the country issuing that currency. %he orderly execution of the foreign

currency s$ap $ould then be at risk.

Interest rate s$aps (IR!. -e#nition. )n agreement bet$een t$o parties to

exchange interest obligations at di8erent rates in respect of a notional principal

amount. )s a rule" #xed interest rates are exchanged for variable ones. %his meansthat only interest payments are s$apped" $hereas no exchange of principal takes

place. Return. %he buyer of an interest rate s$ap (pays #xed interest rates bene#ts

form a rise in interest rates. %he seller of an interest rate s$ap (receives #xed

interest rates bene#ts from a fall in interest rates. %he return on an interest rate

s$ap cannot be determined in advance. Interest risk. %he interest rate risk results

from the uncertainty over future changes in market interest rates. %he buyer or

seller of an IR! is exposed to loss if interest rates fall or rise. redit risk. %he credit

risk encountered $ith IR! is derived from the possibility of counterparty default"

causing the loss of positive cash values or making more expensive covering

transactions in the market necessary. !pecial features of IR!. Interest rate s$aps donot have standardised terms. %he processing details must be contractually agreed

upon in advance. It is therefore imperative to obtain full information on the exact

terms and conditions of interest rate s$aps" in particular7 principal amount term

interest rates agreed

!pecial form7 onstant ?aturity !$ap (?!. -e#nition. ) onstant ?aturity !$ap is

an exchange of di8erent interest rates payable on a #xed nominal amount by t$o


19/38

contracting parties. It is generally an exchange of a variable money market interest

rate (e.g." the Fmonth :@RI3OR against a capital market interest rate (e.g." the D

year :@RIR!. %his capital market interest rate does not remain #xed for the life of

the s$ap" ho$ever" but rather is periodically ad=usted. Return. %he purchaser of the

?! ($ho pays the capital market interest rate earns a return in the event that the

interest curve levels out" e.g." if the capital market interest rates fall and the moneymarket interest rates rise. %he return from a ?! cannot be determined in advance.

Interest rate risk. Interest rate risk results from the uncertainty of future changes in

the interest level of the capital market and money market. %he buyer or seller of a

?! is exposed to a risk of loss if the interest curve becomes steeper or levels out"

respectively. !pecial form7 ?! !preadlinked s$ap. -e#nition. In the case of a ?!

spreadlinked s$ap" di8erent interest rates payable are s$apped" as above. !uch

s$aps generally involve the exchange of a money market interest rate (e.g." the F

month :@RI3OR6 or alternatively a #xed interest rate for the life of the s$ap" on the

one hand" and the di8erence bet$een t$o ?!s (e.g." the Dyear :@R ?! minus

the Eyear ?!" often increased by a certain multiple (e.g." x E. %he ?! spread is

often provided $ith a #xed coupon for a certain initial period. Return. %he buyer of

the ?! spreadlinked s$aps ($ho pays the di8erence bet$een the ?!s earns a

return if the t$o capital market curves involved (e.g." the Dyear :@R IR! and E

year :@R IR! level out. %he return from a ?! spreadlinked s$ap cannot be

determined in advance. Interest rate risk. %he interest rate risk results from the

uncertainty of the future interest rate changes of the shortterm capital market

relative to the longterm capital market in relation to the money market interest

rates (or the amount of the #xed interest rate.

'or$ard rate agreements ('R). -e#nition. 'or$ard Rate )greements are used to

agree on interest rates to be paid at a speci#ed time in the future. !ince 'R)s aredealt in on the interbank market and not on a stock exchange" they do not have

standardised terms. @nlike interestrate futures" 'R)s are customised investment

products in terms of principal amount" currency and interest period. Return. %hrough

buying or selling an 'R)" the investor #xes the interest rate for the period in

&uestion. If the reference rate is higher than the agreed interest rate ('R) price at

the maturity date" the buyer of the 'R) $ill be compensated for the movement in

interest rates. If the reference rate is lo$er than the agreed interest rate at the

maturity date" the seller of the 'R) $ill receive a compensation payment. Interest

rate risk. %he interestrate risk results from the uncertainty over future changes in

interest rates. 0enerally" this risk is all the higher" the more pronounced the

increase or decrease in interest rates is.

redit risk. %he credit risk $ith 'R)s derives from the possibility of counterparty

default" causing the loss of positive cash values or making more expensive covering

transactions at a less favourable price in the market necessary. !pecial features of

'or$ard rate agreements. 'R)s do not have standardised terms" but are customised

investment products. It is therefore imperative to obtain full information on the


20/38

exact terms and conditions of the contract" in particular7 principal amount term

interest rates agreed

Interest rate futures. -e#nition. Interest rate futures are exchangetraded for$ard

contracts on shortterm investments" money market or capital market instruments"

$hich are standardised in terms of maturity and tick si>e. onse&uently" the returnon such an investment (interest rate or price can be #xed in advance. )lso $ith

interest rate futures" unconditional commitments are made" $hich must be ful#lled

once the risks belo$ occur no matter ho$ the futures develop. Return. %he gains or

losses achieved by speculative users of interest futures result from the interest rate

or price di8erential at the end of the future period sub=ect to the terms of the

contract. %he use of interest rate futures for hedging purposes reduces the #nancial

risk of existing or future positions.

Interestrate risk. %he value of an interest rate future depends primarily on the yield

trend of the underlying instrument. %he buyer*s exposure is therefore comparable to

that of a holder of the underlying instrument. %he risk results from the uncertaintyover future interest rate changes in the market. %he interest rate risk encountered

by the buyer or seller of a futures contract is the obligation to put up further margin

or to complete the deal upon maturity" if interest rates rise or fall. 0enerally" this

risk is all the higher" the more pronounced the increase or decrease in current

interest rates is. %he resulting potential of loss may be many times higher than the

original capital invested (initial margin. 2i&uidity risk. In some markets" the closing

out of futures positions (sale/repurchase of contracts may lead to heavy adverse

price movements in case of either excessive supply or excessive demand

Risks )ssessment in Real :state Investments in %imes of 0lobal risis AI)R)

-*)2P)O!D " R@3I5) )5:!IE D"EI:)" -epartment of ivil " :nvironmental and)rchitecture :ngineering" @niversity of Padova Via Vene>ia D" ELDFD" Padova I%)29 D

chiara.dalpaosMunipd.it" E rubina.canesiMdicea.unipd.it )bstract7 )im of the paper

is to provide a novel valuation model to address risk and uncertainty in property

investment decisions. 4hen the future is uncertain and investments are durable

and illi&uid" the decision to invest at a certain point in time and the correct

assessment of risks are key issues. In times of global #nancial crisis" investors need

to kno$ ho$ to measure risks and identify the relationship bet$een risks borne and

risk premiums demanded. Increases in idiosyncratic and systematic risk lead

developers to abandon/delay investments because de facto they feel not con#dent

in pro=ects riskiness and market values assessed by professionals. Risks evaluationis often left to the sensitivity and discretion of valuers. Rigorous risk assessment

measures" based on mathematical algorithms" are here presented. 4e provide an

operational frame$ork to address risk and uncertainty by an integrated approach

that can be easily understood by third parties and applied to di8erent property

types. %he algorithms here proposed allo$ investors to evaluate risks and

opportunities taking into consideration all the di8erent phases of property

investment pro=ects and related risks. Investors" $ith di8erent time patterns of


21/38

income and desired consumption" $ill be therefore enabled to determine the risks

they can tolerate" the return they need and its timing. Gey4ords7 Real :state

Investments" @ncertainty" Risks )ssessment. D Introduction %he #nancial crisis that

erupted in EJ in the @nited !tates had such a severe impact" still evolving" on the

$orld economy that is considered as the $orst economic crisis since the 0reat

-epression. %he crisis" according to the +credit boom and busts, theory" beganapproximately in the second half of EJ" $hen in the @nited !tates the real estate

bubble began to de1ate and" at the same time" many holders of subprime

mortgages became insolvent due to the rise in interest rates. %he burst of the

subprime mortgage crisis $as follo$ed by the decision of some banks to Nfree>eN

the price of their investment funds" suspending sale to prevent depreciation. %he

continuous rise in interest rates has led to the insolvency of about E millions of

)merican families. In )ugust EK" concerns about a possible collapse of the

subprime mortgages led to a sharp fall in stock market indices 5asda& and -o$

ones" $ith serious repercussions on the price lists from all over the $orld. )s a

conse&uence the indices of )sian and :uropean stock exchanges experienced a

series of record lo$s. In Italy" the global crisis a8ected on a large scale the real

estate industry that is still undergoing increasing diculties as a conse&uence of

the credit crunch $orsened by the lack of li&uidity. )fter a decade of strong gro$th

that began in DK and ended in EJ" $hen trades in the residential sector

reached a historical peak of QJ"FQ 5%5 (normali>ed number of transactions" in

EK the volume of trades had a turnaround D


22/38

household incomes. !upply factors are mainly related to both the +hold out

phenomenon, previously mentioned and the deterioration in loan &uality

independently of a rise in ocial interest ratesiS . In a $orld$ide perspective" it is

commonly argued that the crisis $ill start to be overcome $hen consumers" #rms

and private investors $ill feel more con#dent in the stability of economic policies

and #nancial markets. %his stability $ill in turn lead to an increase in investments"employment rates" salaries and consumer consumption. %he existence of a $ell

functioning capital market allo$s investors $ith di8erent time patterns of income

and desired consumption to agree on $hether real estate investment pro=ects

should be undertaken. In order to estimate discount rates for real estate assets"

developers #rstly need to kno$ ho$ to measure risks" ho$ much risk they can

tolerate" the return they need and its timing. %he issue of identifying and assessing

risk and uncertainty $ithin the scope of property valuations is currently one of the

key concerns in contemporary valuation literature J" DL" DJ" EF" E


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buildings in ?ilan to illustrate the results of the algorithms implementation. In

!ection < conclusions are discussed. E Risk assessment and risk measures In order

to cope $ith risk" it is fundamental to de#ne risk in general and risks related to real

estate and property investments. )cademics have longly debated on the di8erence

and the relationship bet$een risk and uncertainty K" Q" EES. It is generally agreed

that uncertainty is due to the lack of kno$ledge and poor or imperfect informationabout the state variables. 'urthermore" the further the analysis is taken into the

future" the greater is the uncertainty and the more uncertain are the outputs. On

this basis" risk is the measure of the di8erence bet$een the actual and the

expected outcomes7 the risk of an asset can be completely expressed by

considering all possible outcomes and the probability of eachiiS . 'ocusing on

property investments" )dair and Autchison DS de#ne risk 4!:)! %R)5!)%IO5! on

3@!I5:!! and :O5O?I! hiara -*)lpaos" Rubina anesi :I!!57 EEEard and exposure. ) large number of contributions in the literature $ere devoted

to risks classi#cation in property assets D" L" DQ" E" ED" Fed in the literature" $ere classi#ed and broken do$n by categories. In their

paper they proposed a novel approach to risk assessments in commercial real

estate development and deeply investigated economic risks that include risksrelated to interest rate" property type" market li&uidity" demand and supply"

purchasability" capital exposure" lifecycle value" area accessibility" buyers" tenants

and risks related to investment returnsiiiS . In this line" in EDE the :uropean 0roup

of Valuers* )ssociations FFS provided a systematic classi#cation of risks into7 a

market risks6 b property related risks (location risk" construction related property

risk" tenants and leases risk6 c #scal and legal risks6 d #nancial risks. %hough

there has been a long debate in the literature on risk de#nition and classi#cation"


24/38

the operators of the real estate market still do not have speci#c methodologies for

measuring risk" di8erently from other areas of #nancial investments. %his

circumstance is not due to lack of interest by real estate operators" but to the

diculties of implementing tools developed for assessing risks in #nancial

investments" $hich need to be adapted to the speci#cities of property

investmentsivS . In order to #ll the gap in the existing literature and provide realestate practitioners $ith speci#c tools to be adopted in risk assessment of property

investments" follo$ing hen and Ghumpaisal DS" in this paper $e are taking into

consideration those risks that are classi#ed as economics risks. Risks associated

$ith economic and #nancial uncertainties are in fact the most crucial factors that

might strongly impact the pro=ect development process and its vitalityvS . In $hat

follo$s" $e provide an operational frame$ork to address risk and uncertainty by an

integrated approach and $e illustrate risk assessment procedures and introduce risk

measures that can be easily understood by third parties and applied to di8erent

property types. 4e focus on economic risks as classi#ed in %able DviS . %able D

RisksU lassi#cation 4e mainly address ?arket Risks and Real :state Operating

Risks. It is rather intuitive that the former are a8ected by #nancial markets and

macroeconomics" $hile the latter are strongly related to property investments and

more speci#cally to real estate development investment pro=ects. ?arket Risks can

be grouped into three main categories7 apital ?arket risk (?r6 Valuation risk (Vr6

?arket 0ro$th Rate risk (?0Rr. 4hile Real :state Operating Risks can be

subdivided into six categories7 Operating risk (Or6 -evelopment risk (-r6 2easing

risk (2r6 2easehold risk (2Ar6 2everage risk (2Vr6 %ax risk (%r. In $hat follo$s $e

de#ne the above risk components and relative measures. 2)!!I'I)%IO5 RI!G!

?arket Risks ?r apital ?arket risk Vr Valuation risk ?0 Rr ?arket 0ro$th Rate

risk Real :state Operating Risks Or Operating risk -r -evelopment risk 2r 2easing

risk 2Ar 2easehold risk 2Vr 2everage risk %r %ax risk 4!:)! %R)5!)%IO5! on3@!I5:!! and :O5O?I! hiara -*)lpaos" Rubina anesi :I!!57 EEEation rate (cap rate

henceforth is lo$er than the property investment*s expected cap rate" then the

investment is &uite conservative. On the contrary" $hen the pro=ect*s cap rate is

lo$er than the market*s cap rate" then the investment*s riskiness is moderate or

aggressive (%able F. Vr Valuation risk de#nes $hether an asset is overvalued and$ill earn less than expected $hen it matures or is sold by the holder. 'actors

contributing to Vr include incomplete data" market instability" and poor data

analysis performed by the professional assessing the asset value. Overvalued

assets might generate losses for their o$ners. %he value of real estate assets can

be generally broken do$n into t$o components7 cash 1o$ from contracts and resale

(or residual price. %he former has a higher certainty and presents less risk" the

latter is more uncertain. In particular" the greater the reliance on the residual to


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produce the desired return" the greater the asset*s risk. 4ith respect to this second

component" $e can calculate the Valuation risk as follo$s7 )P 5PV Vr ; RP (E

$here 5PVRP is the 5et Present Value (5PV of residual proceeds and )P is the

asset*s construction/ac&uisition cost. 4hen Vr JT it can be considered as

aggressive" other$ise $hen ETVrDELT" it is conservative $hen ?0RrET it is

conservative other$ise it is moderate (%able F. 2r 2easing risk measures theasset*s share of overall market absorption" by comparing the asset performance to

the overall market trend. In other $ords" it is the risk that the vacant space $ill be

absorbed at a rate $hich is slo$er than pro=ected during the ac&uisition

under$riting of the asset. It is signi#cantly a8ecting the overall investment riskiness

$henever the property is not keeping pace $ith the market or absorbing its fair

share of the market leasing activity. %he leasing risk can be determined according to

(J7 3V ?V 2@ /?) 2r ; yDyD / (J $here 2@Dy represents the s&uare meters of

rented space in a speci#c year (D year 2ease @p" ?)Dy is the market demand*s

absorption relative to that year" 3V is the property vacancy and ?V is the property*s

sectorspeci#c market vacancy. 4hen 2rDDT it is in the aggressive range"

other$ise the risk is moderate (%able F. 2Ar 2easehold risk accounts for the

probability that the tenant lease terms are above market and that the purchase

price is therefore in1ated to re1ect both the intrinsic real estate value plus the

above market leasehold interest. In other $ords" it is the risk to value the above

market rent at a higher discount rate than the core asset7 if the market rents are

lo$er than the pro=ect*s ones" in order to ensure that the investment $ell performs

and mitigate risk" it might be necessary to adopt an higher capitali>ation rate" to

ad=ust the asset*s value to market values. )lternatively" it is possible to capitali>e

the average market rent and add the spread bet$een the average market rent and

the actual rent paid by the lessee capitali>ed for the estimated number of years that

the contract terms (i.e. the pro=ect*s rent are above market. 2Ar is measured by theratio bet$een the expected contract value" (i.e. the 0ross Rental Income and the

average market rents (?.R.. ?R 0RI 2Ar ; (K $here 0RI is the gross rental income

and ?R is the market average rent. In other $ords 0RI is the expected contract

value. 4hen 2ArDDLT is aggressive" other$ise moderate (%able F. 2Vr 2everage

risk occurs $hen the cost of debt exceeds the return on the asset to be ac&uired.

2everage creates risk as the lender has a priority position in the repayment of the

outstanding loan balance" upon sale or li&uidation of the asset and it is related to

the percentage of e&uity and debt and the related cost of capital7 @! contract )

0ross 3Partial 5et F 5et 2andlord exposure DT T Aotel Residential Oce

Retail Industrial 3onded lease @tilities %axes Insurance Operating costs leaning?echanical maintenance !tructural cost 4!:)! %R)5!)%IO5! on 3@!I5:!! and

:O5O?I! hiara -*)lpaos" Rubina anesi :I!!57 EEE


26/38

onservative Or FF"FF WQ E DD )ggressive 2Ar D


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5. ash 3low

The 4uality of the )eal 3uture partner network enables us to limit ourselves to the most attractive )eal 6state ob$ects.The running costs associated with these buildings are well controlled and often at a low level whereas returns generallyexceed the market benchmark. These returns finance the creation of financial reserves or the payment of free cashflows to the owners.

!. Tax benefits

omparatively, real estate investment has the most favorable tax benefits. The tax benefits that apply in each case isdependent on the structure of the investor 0or the investing legal entity1, the current financial situation, as well as onthe property itself. The most important tax issues to be investigated relate to*

- 2mortization methods7

- Transfers of capital gains after termination7 and

- 2llocation of losses on takeovers

Risk

The level of risk associated with real estate investments is relatively low. This limited volatility comes from the stabledevelopment of supply and demand. The living and working space demanded by individuals and organizations only

marginally ad$usts to changes in price. 8n the other hand, the basic resource for real estate is land, which can not be9produced: at will. The popularity of real estate as an asset class derives from the fact that at this low level of riskattractive returns can still be generated.

The following paragraphs outline the five different types of risk associated with real estate investments.

. +ational market risk

The real estate market has historically been considered relatively risky. Today, supply and demand have become moreli4uid and transparent, thereby stabilizing the real estate market. It generally reacts more 4uickly and more sensitivelyto changes in the economy.

(. )egional market risk

The most important characteristic of a building is its location. %efining the 4uality of the location is something thatdepends on a number of factors* urrounding buildings and construction pro$ects, building zone planning, connections tohighways and public transportation are the ones you may first look at. It;s essential for any investment to know all thesevariables, and we include this research as part of our due diligence process.

". 8b$ect 4uality

s credit standing prior toinvestment, signing long-term tenancy agreements, and=or supporting tenant loyalty through an attractive mix of tenantsand a good property location. Tenant risks tend to focus on the likelihood of keeping or losing existing tenants, whereasmarket risks discussed above give an indication of how easy it is to find new tenants.

!. 3inancing risk 0leverage1

3inancial risks are more easily controlled than market and ob$ect risks and can be ad$usted in order to meet the needs0risk profile1 of our clients. The following two parameters can be ad$usted*

- Type of investment

ontained risks vary depending on if the investor grants a loan, grants a participative loan,

supplies mezzanine financing or purchases regular e4uity.


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- 6xtent of financing

The risk of an investment pro$ect decreases if less borrowed capital is used to finance

purchases. 2t the same time, the leverage effect is weakened. ?asically, the risk of an

investment pro$ect decreases if the amount of e4uity being used to finance the ob$ect

increases.

Two types of risk become relevant when looking at an investment as part of an overall portfolio.

- urrency risk

If you have an investment in a foreign currency and the corresponding exchange rate

decreases, profit and sometimes even the investment capital decrease. This risk is not an

integral component of a real estate investment. The causes of exchange rate fluctuations are

rarely related to real estate markets and should not be attributed to the performance of your

real estate investment broker. The investor>s overall portfolio strategy determines the

currency diversification to be pursued and to which extent risks should be hedged.

- nsystematic risk

If the performance of two separate investments is not exactly the same, they do not correlate

##@. In such cases the effect of a loss in one investment is partly or fully neutralized bybetter results achieved by other investments in the portfolio. ?y limiting the fluctuation of the

value of such a portfolio its overall risk exposure decreases. The portion of the investment risk

which can be eliminated through such a diversification strategy is called unsystematic risk. 2s

the real estate business does not correlate strongly with other investor markets, the

diversification into and within real estate is a must in order to stabilize and optimize an

investment portfolio.

Over the last 10 years, real estate in India has given good returns.

So, like millions of citizens, Yashpal Arora, who lives in Gr!aon, a "ew #elhi

s$r$, wanted to $enefit from risin! property prices. %e invested in plots

advertised $y &ian Infrastrctre, a real estate company lanched in '00(

with several projects across the country. Impressed $y the company)s

advertisements, Arora invested in mltiple plots in "eemrana, *aipr and

%aridwar in '00(. Arond +0 of his friends and relatives also invested in the

company)s proects.

-he total investment of or !rop was /s '. crore. ach one of the +02oddpeople in or !rop $ooked plots in these proects in '00( with whatever

disposa$le money they had, from a few lakhs to mch more,- says Arora.

In '003, Arora visited "eemrana on $siness. 4hile there, he tried to locate
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29/38

his plot. There was no sign of the project. %e so!ht information from s$2

re!istrars, tehsildars and town planners at "eemrana, *aipr and %aridwar.

YASHPAL ARORA (urgaon!" #$%&ST'&$T Plots in $ee)rana"

*aipur and Haridwar (+,,-! . Arora got swayed /y advertise)ents

of %ian #nfrastructure" a s)all realty fir)0 He invested in )ultiple

plots at various locations0 #n +,,1" he ca)e to 2now there were nosigns of the projects in which he had par2ed his )oney

he proects, it trned ot, had never e5isted. After 6eries sent to thecompany went nanswered, Arora lod!ed a complaint with the conomicOffences 4in! of #elhi 7olice. he s$se6ent liti!ation dra!!ed on for years,after which the cort ordered the company $e li6idated.

Accordin! to Arora, who is now spearheading agitation againstdevelopersthro!h an association, arond (,000 people who have invested inproects $y &ian will receive their money after secred creditors are paid theirdes.

/aesh 8mar, a '32year2old resident of #warka, "ew #elhi, was sli!htlylckier than Arora. 8mar $ooked a 1,000 s6are feet office space in a proectof 9itra 7roperties, a s$sidiary of India$lls /eal state, part of a lar!ecorporate hose. In Septem$er '010, he paid /s ' lakh )enrolment fee) for
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30/38

space in a commercial comple5 in Gr!aon. %e was hopin! for $i! retrnswith the $ilder annoncin! a lanch price of /s :0 lakh.

he proect, which was to start in three months, did not take off even after ayear. #rin! this period, the /ro2er 2ept on )isleadinghim with prices

showin! that his investment has risen in vale.

RA*&SH 34'AR (5war2a" $ew 5elhi!" #$%&ST'&$T Office inurgaon (+,6,! . 3u)ar paid Rs + la2h for an office unit in the pre.

launch stage of a co))ercial co)ple7 of 8itra Properties" an

#ndia/ulls Real &state su/sidiary0 After a long wait of around 69

)onths" he was as2ed to ta2e his )oney /ac2

After many 6eries, the company asked him to take $ack his money. At first,8mar didn)t want to e5it as that wold have meant losin! ot on retrns inthe $oomin! Gr!aon property market. %owever, he a!reed after he came to

know that others, too, were optin! ot. %e was refnded the money after hesi!ned a declaration that the money was $ein! !iven $ack on his re6est.

-I had invested in e5pectation of !ood retrns. I did not want the money

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