The market for residential real estate brokerage services: Costs of production and economies of scale

Although the market for real estate brokerage services has been the subject of intense scrutiny for many years, little empirical evidence has been forthcoming regarding the performance of this market. This paper employs a translog cost function to model the underlying production function for the residential real estate brokerage industry. The results indicate that, except for very large firms, modest economies of scale persist throughout almost the entire range of output. Our results also indicate that while average firm size is increasing, many real estate firms are too small to take full advantage of the cost reductions possible with a larger scale of operation. Equally important, large firms do not command a competitive advantage over smaller firms, as fer as unit costs are concerned.     

Are Securitized Real Estate Returns more Predictable than Stock Returns?

This paper examines whether the predictability of securitized real estate returns differs from that of stock returns. It also provides a cross-country comparison of securitized real estate return predictability. In contrast to most of the literature on this issue, the analysis is not based on a multifactor asset pricing framework as such analyses may bias the results. We use a time series approach and thus create a level playing field to compare the predictability of the two asset classes. Forecasts are performed with ARMA and ARMA–EGARCH models and evaluated by comparing the entire empirical distributions of prediction errors, as well as with a trading strategy. The results, based on daily data for the 1990–2007 period, show that securitized real estate returns are generally more predictable than stock returns in countries with mature and well established REIT regimes. ARMA–EGARCH models are found to have portfolio outperformance potential even in the presence of transaction costs, with generally better results for securitized real estate than for stocks.     

Product market effects of real estate collateral

This paper exploits shocks to the value of real estate collateral to study how exogenous changes in firms' external financing capacity affect their competitive performance and industry dynamics. Firms with appreciating collateral tend to gain market share relative to their product market rivals. Shocks to collateral lead to less competitive product markets. The effects of collateral are stronger in markets where firms compete in strategic substitutes or face competitors with restricted access to external financing, and when real estate prices are instrumented with the interaction between housing supply constraints and mortgage rates. These results highlight the strategic importance of collateral.     

Does Joint Bidding Reduce Competition? Evidence from Hong Kong Land Auctions

This paper analyses firms’ bidding behavior in auctions for development land in Hong Kong. The real estate market in Hong Kong is considered to be oligopolistic as it is dominated by a few top real estate firms, which have strong financial strength/development capacity and large land banks. Joint bidding is used by other real estate firms (“large” firms) to pool resources/capital in order to compete with the top firms. We test whether joint bidding increases or decreases the level of competition in land auctions, using land auction data in Hong Kong from 1991 to 2011. We find that large real estate firms are more likely to be successful than top firms at auctions when bidding jointly. However, joint bidding/winning does not harm competition as reflected by the number of bids, bids per bidder and number of bidders. Land prices also increase significantly in auctions won by joint bidders or alliances of large developers. Our results suggest that joint bidding enhances competition by allowing large firms to act strategically by pooling their resources and act aggressively to compete with the top firms.

     

Frothy Housing Markets and Local Stock-Price Movements

Prior empirical research finds habitat effects manifest in stock pricing among firms that share headquarters cities. We empirically investigate whether trends in residential real estate prices affect headquarters-city stock pricing phenomena for companies across U.S. metro areas for 1989?C2004. Specifically, we hypothesize that stocks of firms headquartered in ??hot?? residential real estate markets experience higher returns compared to stocks of firms from ??cold?? markets. We also hypothesize that stocks of firms headquartered in hot real estate markets display stronger return comovement with same-city stocks. We find support for these hypotheses during the 1999?C2004 sample period which coincides with the start of the housing bubble of the 2000?s; we find mixed results in earlier periods. Our findings indicate that city-specific home price patterns conditionally affect stock pricing of local firms, suggesting that investor behavior is influenced by localized shocks to household real estate wealth.     

A Web Of Shocks: Crises Across Asian Real Estate Markets

The behaviour of real estate markets during the 1997–98 Financial crisis in Asian economies has received little attention despite the extensive research on other asset markets over this time. This paper examines the transmission of shocks across national real estate markets prior to and during the Asian crisis using a multivariate latent factor framework. The results reveal that diversification opportunities prior to the crisis are much reduced during the crisis. A comparison with regional equity markets shows that the transmission of shocks differs across the real estate and equity markets, providing evidence that investment in multiple asset classes provides some protection from large market downturns.     

Momentum in Residential Real Estate

This paper examines whether there is return momentum in residential real estate in the U.S. Case and Shiller (American economic review 79(1):128–137, 1989) document evidence of positive return correlation in four U.S. cities. Similar to Jegadeesh and Titman’s (Journal of finance 56:699–720, 1993) stock market momentum paper, we construct long-short zero cost investment portfolios from more than 380 metropolitan areas based on their lagged returns. Our results show that momentum of returns in the U.S. residential housing is statistically significant and economically meaningful during our 1983 to 2008 sample period. On average, zero cost investment portfolios that buy past winning housing markets and short sell past losing markets earn up to 8.92% annually. Our results are robust to different sub-periods and more pronounced in the Northeast and West regions. While zero cost portfolios of residential real estate indices is not a tradable strategy, the implications of our results can be useful for builders, potential home owners, mortgage originators and traders of real estate options.     

Real Estate Risk,Corporate Investment and Financing Choice

This paper empirically examines how real estate risk impacts corporate investment and financing decisions. Using a panel of United States firms from 1985 to 2013, we document that real estate risk is negatively associated with firms’ long-term investments and long-term external financing in equity and debt. The results are robust to different risk measurements and in particular salient during the financial crisis period when the endogeneity between risk and investment is less of a concern. The effect on firm leverage, however, depends on risk measures. Overall, in contrast to previously documented positive effects of the real estate value, real estate risk exposure exhibits mostly the opposite effects on investment, financing and capital structure. This difference is consistent with option value determinants. Findings in this paper shed new lights on the impact of real estate holding on corporate decisions, offer a new explanation for the underperformance of hedge funds’ real estate strategies, and confirm the theoretical predictions in Deng et al. (2015).     

Real Estate Mergers: Corporate Control &; Shareholder Wealth

This study contributes new evidence to distinguish why mergers occur in the real estate industry by quantifying the combined firm return for nearly three decades of real estate mergers. As a measure of the overall change in shareholder wealth created by a merger, the combined firm return plays a key role in differentiating competing merger theories and is quantified for the real estate industry for the first time. Findings from this study are consistent with the notion that real estate mergers occur because firms with superior management acquire other firms that possess unexploited opportunities to cut costs and increase earnings (the inefficient management hypothesis). Furthermore, the results indicate that real estate mergers generally create wealth, as shareholders at best realize modest gains and at worst break even.     

Domestic and International Equity REIT Joint Ventures: Structuring Corporate Options

We examine a sample of 185 Joint Ventures parented by publicly-traded Equity Real Estate Investment Trusts 1994–2001. These transactions are found to be motivated by a wide variety of corporate strategies. Shareholder returns for REIT parents are significantly positive, which is consistent with wealth effects previously reported for joint ventures formed by non-REIT real estate firms. In a subsample of joint ventures formed to structure partial dispositions of property, however, abnormal returns are significantly negative, which is consistent with the free cash flow theory of Jensen. REIT joint venture experience in Asia has been neutral for value, but may improve in the future if early ventures have created options for more efficient partnerships later.