Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?

A transactions-driven commercial real estate return series is generated in this study to determine whether the reliance on appraised values in the estimation of real estate returns is the source of the reported underpricing of real estate relative to stocks, bonds, and bills when analyzed in a traditional mean-variance setting. The reported underpricing of commercial real estate would be rational if transactions-driven returns exhibit more variance than appraisal-driven returns. While we find that transactions-driven real estate returns have greater variance than appraisal-driven returns for individual properties, most of the individual property risk is idiosyncratic and diversified away at the portfolio level. Real estate continues to be a dominate asset class in mean-variance allocation models even when represented with transactions-driven indices.¹     

U.S. Office Market Values During the Past Decade: How Distorted Have Appraisals Been?

The leading time series of real estate returns is the Russell-NCREIF (RN) Property Index. The RN series tracks returns, cash flow plus appraised capital gains, for multiple property types. To evaluate the accuracy of the capital-gains component of the office-market return series, this paper constructs two benchmark measures for the present value of projectable office-market cash flows from 1982 to 1991 and compares these with a real value series based on the RN capital-gain component. The RN-based series runs 30% above the highest of the benchmarks throughout the 1986–1989 period. While this overstatement is consistent with the development of a price bubble, failure of the bubble to burst until 1990–1991 is implausible. Real estate experts recognized overvaluation in assessments as early as the spring of 1986.
The RN Office-Market Index was slow to register price declines when the markets first weakened and then overstated the rate of decline once the market began to bottom out. This pattern likely reflects incentives for appraisers to smooth potentially temporary price volatility and for investment managers to maintain appraised values in declining markets. It traces as well as to systematic differences in the character and condition of the properties that lend to trade at different stages of the real estate cycle. These incentives and differences provide reason to believe that other RN indexes were similarly distorted.     

Forecasting the Discounts of Market Prices from Appraised Values for Real Estate Limited Partnerships

A vexing problem for the appraisal industry has been estimating an appropriate discount for the value of real estate limited partnerships (RELPs) relative to their appraised value. This research develops a linear regression model that explains over 80% of the cross-sectional variation in discounts across 60 RELPs using characteristics of each partnership. Among a holdout sample of 41 RELPs, the model provides forecasts of discounts that are superior to assuming no discount or applying a mean discount to all partnerships. Discounts are greatest for RELPs with low current yields, low leverage and high trading ranges for their market prices.     

Capital Structure Decisions in Real Estate Investment

This study examines the financing decisions of real estate investors and the choice of capital structure when acquiring income-producing properties. Drawing from the literature in finance and real estate, we develop a capital structure model for real estate investment and derive six hypotheses regarding the relationship of the overall loan-to-value ratio chosen by an investor to selected characteristics of the investment. The hypotheses are then tested using financing data from a sample of apartment and commercial transactions over a fifteen-year period in a specific real estate market. The empirical findings strongly support the importance of depreciation deductions, financial distress costs, capital constraints, tax rates, and interest rates as determinants of the capital structure of real estate investors.     

股权结构与内部控制有效性的案例分析

为了提高企业内部控制有效性,增强企业的核心竞争力,在相关文献研究的基础上,选择1家房地产上市公司纵向研究股权结构变化对企业内部控制有效性的影响,然后再选取4家具有代表性的房地产上市公司进行横向案例研究,分析不同的制衡股东性质对企业内部控制有效性所产生的影响。结果表明:在房地产行业内,万通地产的股权结构由一股独大转变成股权制衡的局面后,公司内部控制有效性有了一定的提升。通过横向分析对比张江高科、绿地控股、光大嘉宝、阳光城等4家房地产上市公司可知,当都存在国有制衡股东时,与国有公司相比,非国有公司内部控制质量更佳;在制衡股东为非国有股东时,公司的内部控制有效性更高。案例分析结果在其他类似房地产上市公司提高内部控制有效性的应用场景中具有参考价值。     

Influential Journals, Institutions and Researchers in Real Estate

A threshold citation approach is used to measure the research influence of academic real estate journals, institutions and individual researchers. Real Estate Economics followed by The Journal of Real Estate Finance and Economics and Journal of Real Estate Research are the most influential real estate journals. Almost 63% of heavily cited works in core real estate journals are published in real estate journals. Twenty-one percent of the heavily cited works are published in Real Estate Economics . An overwhelming 80% of the citations of the 21 most heavily cited papers in real estate come from articles published in real estate journals. Even when real estate articles are published in top-tier finance and economics journals, the majority of the citations associated with these articles come from top real estate journals. This provides strong evidence of the existence of a distinct real estate research discipline. As compared to prior studies, an expanded universe of institutions is found to influence real estate research. Research-extensive universities generating high-quality economics, statistics and finance research influence the real estate discipline. The individuals that are most influential, however, are generally those with substantial real estate discipline specific research.     

Portfolio Considerations in the Valuation of Real Estate

When a real asset rises in price faster than inflation (as real estate did in the late 1970s) and rises significantly in price over an extended period (as real estate has done for the last decade and one-half), it concerns valuation and investment professionals who fear about it being over-valued. One of the reasons for such price performance may be an increase in demand due to the portfolio characteristics of the asset during the period of time in question. For real estate this means the proportion included in optimal portfolios should be significant and increasing as individual tax rates increase in an environment of increasing average tax rates.
This study uses six tax brackets (0%, 10%, 20%, 30%, 40%, 50%) and portfolios consisting of three traditional assets (NYSE common stocks, corporate bonds and small stocks) plus three types of real estate (residential, business and farmland) to demonstrate that this is what has transpired in the real estate markets. Optimal portfolio weights are derived for each asset for after-tax portfolios. Real estate in general and residential real estate especially increased as a proportion of the optimal after-tax portfolio as individual tax rates increased. Other studies are used to demonstrate an environment of increasing average tax rates.     

A Different Look at Commercial Real Estate Returns

Commercial real estate makes up a relatively small percentage of most institutional portfolios, even though the existing literature has consistently reported attractive risk-return characteristics that would suggest much larger allocations. This discrepancy has been explained by a perceived lack of comparability between return series calculated for real estate and those calculated for other asset classes. Just as investors actively involved in the futures markets do not consider individual common stocks to be traded continuously, those active in the stock market do not consider real estate to be traded continuously. In both cases, adjustments to reported returns are necessary to achieve a degree of comparability. This study makes such adjustments, using sales data from properties that help comprise the National Council of Real Estate Investment Fiduciaries / Frank Russell Company (NCREIF/FRC) Index to generate a "transaction-driven" commercial real estate return series. Examination of the risk-return characteristics of this series shows that it is quite different from traditionally reported real estate return series and far more consistent with risk-return characteristics that have been reported for other asset classes.     

The Separation of Real Estate Operations By Spin-Off

In this paper, we consider spin-offs as a vehicle to separate real estate operations from other real estate and/or non-real estate operations. For a sample of 33 such spin-offs announced and completed between 1962 and 1982, we document significantly positive abnormal returns around spin-off announcements. Using the standard event-time methodology, we find average excess returns of 5.7% in the two-day interval surrounding the first Wall Street Journal report of a pending spin-off. While the gains associated with spin-offs by real estate firms are positive on average, they are small in comparison to the 9.1% two-day announcement period abnormal returns surrounding proposals by non-real estate firms to divest real estate operations.     

Illiquidity and Pricing Biases in the Real Estate Market

This article addresses the micro-analytic foundations of illiquidity and price dynamics in the real estate market by integrating modern portfolio theory with models describing the real estate transaction process. Based on the notion that real estate is a heterogeneous good that is traded in decentralized markets and that transactions in these markets are often characterized by costly searches, we argue that the most important aspects defining real estate illiquidity in both residential and commercial markets are the time required for sale and the uncertainty of the marketing period. These aspects provide two sources of bias in the commonly adopted methods of real estate valuation, which are based solely on the prices of sold properties and implicitly assume immediate execution. We demonstrate that estimated returns must be biased upward and risks downward. These biases can be significant, especially when the marketing period is highly uncertain relative to the holding period. We also find that real estate risk is closely related to investors' time horizons, specifically that real estate risk decreases when the holding period increases. These results are consistent with the conventional wisdom that real estate is more favorable to long-term investors than to short-term investors. They also provide a theoretical foundation for the recent econometric literature, which finds evidence of smoothing of real estate returns. Our findings help explain the apparent risk-premium puzzle in real estate—that is, that ex post returns appear too high, given their apparent low volatility—and can lead to the formal derivation of adjustments that can define real estate's proper role in the mixed-asset portfolio.     

The Cross-Sectional Dispersion of Commercial Real Estate Returns and Rent Growth: Time Variation and Economic Fluctuations

We estimate the cross-sectional dispersions of returns and growth in rents for commercial real estate using data on U.S. metropolitan areas over the sample period 1986 to 2002. The cross-sectional dispersion of returns is a measure of the risk faced by commercial real estate investors. We document that, for apartments, offices, industrial and retail properties, the cross-sectional dispersions are time varying. Interestingly, their time-series fluctuations can be explained by macroeconomic variables such as the term and credit spreads, inflation and the short rate of interest. The cross-sectional dispersions also exhibit an asymmetrically larger response to negative economics shocks, which may be attributable to credit channel effects impacting the availability of external debt financing to commercial real estate investments. Finally, we find a statistically reliable positive relation between commercial real estate returns and their cross-sectional dispersion, suggesting that idiosyncratic fluctuations are priced in the commercial real estate market.     

Bank Efficiency, Risk-Based Capital, and Real Estate Exposure: The Credit Crunch Revisited

The turbulent real estate market during the early 1990s coincided with the implementation of risk-based capital standards for commercial banks. In this study we use non-parametric linear programming techniques to identify the lost real estate lending due to bank inefficiency. Inefficiency may arise from one of three sources: risk-based capital standards which constrain bank real estate lending, inefficiency stemming from managerial oversight of real estate lending, and scale inefficiency which arises from banks not operating at constant returns to scale. The results indicate that the lost real estate lending associated with risk-based capital standards averaged 2.7% of total bank assets. However, banks could compensate by exercising better managerial oversight of real estate lending and by operating at constant returns to scale.     

The Effect of Alternative Return Measures on Restricted Mixed-Asset Portfolios

A restricted portfolio is constructed which includes NYSE common stocks, corporate bonds, government bonds, small capitalization common stocks, residential real estate and farmland and returns for each of four different tax brackets (0%, 15%, 30%, 45%). Next, three alternative measures of rates of return for residential real estate and farmland are used. Finally, since some researchers believe that standard risk measures (variance and standard deviation) do not capture the total risk in real estate, the risk for the real estate returns is increased five times while the returns are held constant. The twenty–four optimal portfolios (four tax brackets with two measures of risk and three measure of return for residential real estate and farmland) are then derived. These results are then compared and contrasted to each other to ascertain the change in sensitivity of the optimal portfolios due to different tax rates, different rates–of–return estimates and different risk estimates.     

基于主成分分析的我国房地产业周期波动研究

运用主成分分析法构造房地产业景气综合指标（主成分）,第一主成分贡献率为0．96829,说明它保留了原始变量96．829％的信息,在房地产业周期波动分析中就可以把其他主成分舍弃。第一主成分与原始变量的相关系数p称为因子负荷量为0．70632,表明第一主成分反映了商品房销售额指标70．632％的信息。选择商品房销售额指标作为代表,来研究房地产业周期变动的特征和规律性是可行的。运用时间序列加法模型和乘法模型分析了我国房地产业周期波动的特征和规律性,我国房地产业循环波动的周期为12-13年。     

An Approach to Industrial Real Estate Market Segmentation and Valuation Using the Arbitrage Pricing Paradigm

This paper investigates whether a segmented market exists for industrial real estate with respect to risk and return characteristics. Given the existence of industrial market segmentation, the next issue examined is whether a submarket perspective or an integrated real estate market orientation provides better rate of return estimates for individual industrial properties using an Arbitrage Pricing Theory (APT) framework. The results support the existence of regional markets for industrial real estate. A submarket orientation rather than an integrated perspective is also found more appropriate in predicting returns on industrial real estate.     

The Impact of Market Imperfections on Real Estate Returns and Optimal Investor Portfolios

This study investigates the consequences of several imperfections associated with real estate markets on pricing and optimal investor portfolios from a CAPM context. CAPM assumptions are relaxed to recognize illiquidity, the consumption and investment attributes of owner-occupied housing, and a mildly segmented market structure. The study finds that relaxing the CAPM assumptions lead to a separate pricing paradigm for financial assets, income-producing real estate and owner-occupied housing respectively, that a "dividend effect" arises for real estate as the result of illiquidity, and that illiquidity reduces the extent to which investors hold real estate in their portfolios.     

The Markets for Real Estate Assets and Space: A Conceptual Framework

In this study, we present a simple analytic framework that divides the real estate market into two markets: the market for real estate space and the market for real estate assets. After describing the size and character of flows and stocks in the U.S. real estate market, we use our framework to demonstrate the important connections between the space and asset markets. We illustrate how these real estate markets are affected by the nation's macroeconomy and financial markets, tracing out the impacts resulting from various exogenous shocks on rents, asset prices, construction and the stock of real estate.     

Real Estate for the Long Term: The Effect of Return Predictability on Long-Horizon Allocations

We examine how the predictability of real estate returns affects the risk of, and optimal allocations to, real estate for investors of differing investment horizons. Returns to direct real estate are mean reverting, and risk decreases with horizon. This is driven by a tendency for property transaction prices to overshoot inflation. Mean reversion in real estate returns is weaker than that of equities, resulting in real estate having similar risk to equities for long-term investors. However, optimal portfolios have large allocations to direct real estate at all horizons, and the allocation increases with horizon. Finally, we find that real estate investment trusts are a redundant asset class for investors with access to direct real estate as an asset class, but they do have a role in optimal allocations when direct property investment is not feasible.     

基于Hedonic模型的深圳房地产价格指数研究

为了反映房地产价格的真实变动情况,采用特征价格法建立了深圳市房地产价格指数模型,并采用实际的成交数据进行分析。通过对原始交易数据的修正,将不同品质的房产修正为同一品质的房产,使房地产价格指数的计算更加科学、客观。连续运行五年的房地产价格指数表明,基于特征价格法编制的房地产价格指数具有合理性和可行性。     

Real Estate Investments,Product Market Competition and Stock Returns

By limiting operating flexibility, real estate investments are found to increase firm risk, thus expected returns. This study introduces product market competition as a critical determinant of the relation between real estate investments and stock returns. As part of capacity strategies, these investments are generally associated with increased market power and lower cash flow volatility in oligopolistic industries. I present a simple model of oligopolistic competition showing a negative relation between real estate holdings and firm beta, and empirically confirm this prediction. Controlling for product market competition enhances identification of the endogenous relation between real estate investments and stock returns.