Real Estate Returns and Risk with Heterogeneous Investors

This article develops a theoretical framework and formulates a unified risk metric that integrates both real estate price risk and uncertainty of time on market (TOM). We demonstrate that real estate sellers with different degrees of financial distress face not only different marketing period risks, but also receive different return distributions upon successful sales. The major findings of this article can be summarized as follows. First, we show that real estate return and risk, which account for both price and TOM risk, are investor specific, varying over investors with different financial circumstances and holding periods. Second, the traditional valuation of real estate return and risk, which is based solely on the return distribution of a successful sale without considering the uncertainty of TOM and the investor's financial circumstances, underestimates real estate risk and exaggerates real estate return. Third, our empirical applications in both residential and commercial real estate markets show that the Sharpe ratio estimated by the traditional approach is seriously overstated—to the largest extent for investors with high financial distress. In addition, we find that, given the typical 5‐ to 7‐year holding period for real estate, the Sharpe ratios estimated by integrating both price and TOM risk are much in line with the performance of financial assets. These findings can help to explain the apparent “risk‐premium puzzle” in real estate.     

The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence

The seller of a real estate property and his broker have two primary goals: to sell the properly for as high a price as possible and as quickly as possible. While these are separate objectives, they are closely related through the listing price of the seller. The listing price affects how long it takes to find a buyer (i.e., Time On the Market = TOM), and TOM influences the price that results from the bargaining between the seller and the buyer. This leaves the seller and his agent with an important question: What is the optimal price to be asked for the property? The objective of this research is to provide a theoretical and empirical analysis of the impact of listing price on TOM and the transaction price.     

Another Take on Real Estate's Role in Mixed‐Asset Portfolio Allocations

This article examines real estate's role in institutional mixed‐asset portfolios using both private‐ and public‐real estate indices, as a means of examining varying real estate‐related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest—using infinite‐horizon returns and all of the caveats that accompany such a perspective—that real estate allocations of approximately 10–15% of the mixed‐asset portfolio represent an upper bound for most investors. For those investors preferring low‐risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high‐risk portfolios, public real estate (with its embedded leverage of 40–50%) is the vehicle serving this allocation preference—with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate‐risk portfolios, an intermediate‐leverage approach seems optimal.     

Search Benefit in Housing Markets: An Inverted U‐Shaped Price and TOM Relation

The nature of the relationship between a property's selling price and its marketing time in the housing market remains an open question to date, despite almost 40 years of inquiry and hundreds of regressions conducted on various data sources. This study attempts to settle the long‐standing open question by examining the issue from a new perspective. We demonstrate that the true price–TOM relationship should be nonlinear and characterized by an inverted U‐shaped curve wherein the selling price increases with TOM up to a certain threshold, reflective of a positive exposure effect and decreases thereafter to reflect a negative stigma effect. This relationship is borne out in an empirical analysis using a large sample of home sales from the Hampton Roads, Virginia metropolitan area during an extended period of time. We then formulate hypotheses about the benefit of search by home sellers, which are subsequently confirmed by the empirical findings.     

The Ex‐Day Price Behavior of REITs: Taxes or Ticks?

Taxes and microstructure constraints are often cited as possible explanations for why stock prices drop by less than the dividend on their ex‐dates. Using a sample of real estate investment trusts, which have no significant correlation between dividend size and yield, we find that close‐to‐open ex‐dividend price drops are related to dividend size as suggested by the microstructure models, but close‐to‐close price drops are related to dividend yield as predicted by the tax theory. These results imply that overnight price drops are primarily determined by microstructure, but that trading during the ex‐day causes prices to adjust to reflect individual tax preferences.     

How Do Land Auction Formats Influence the Market Structure and Aggregate Surplus of Real Estate Development?

This article proposes a duopoly dynamic game theoretic model to investigate the market structure and aggregate surplus of real estate development when land is sold in a sealed‐bid first price auction vis‐à‐vis an open English auction. It relaxes the assumption of symmetric bidders. The land values have common value and private value components. We find that the sealed‐bid first price auction introduces competition in the real estate development market. The open English auction leads a monopoly market. State agencies are recommended to increase the aggregate surplus of real estate development by publishing past bidding information under the sealed‐bid first price auction and reducing information asymmetry between bidders.     

Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Values

This study investigates the price effects of environmental certification on commercial real estate assets. It is argued that there are likely to be three main drivers of price differences between certified and noncertified buildings. These are additional occupier benefits, lower holding costs for investors and a lower risk premium. Drawing upon the CoStar database of U.S. commercial real estate assets, hedonic regression analysis is used to measure the effect of certification on both rent and price. The results suggest that, compared to buildings in the same submarkets, eco‐certified buildings have both a rental and sale price premium.     

Real Estate in a Mixed‐Asset Portfolio: The Role of the Investment Horizon

In this article, three oft‐mentioned special characteristics of the real estate asset market—high transaction costs, marketing period risk and return predictability—are addressed in analyzing the role of U.K. commercial real estate investments in a mixed‐asset portfolio. Due to favorable horizon effects in risk and return, the allocation to real estate in a portfolio with stocks, bonds and cash increases strongly with the investment horizon. Examining the relative importance of return predictability, transaction costs and marketing period risk for the optimal allocation to real estate, the article finds that the consideration of return predictability is very important, except for short‐term horizons. Accounting for transaction costs is crucial for short‐ and medium‐term investors. Marketing period risk appears to be negligible. Traditional mean‐variance analysis—that is, ignoring return predictability, transaction costs and marketing period risk—can be very misleading.     

房地产估价的基本问题及其关系研究

从事房地产估价工作，首先必须掌握估价的基本理论问题，并将其运用于估价实践，通过估价实践不断研究和解决新问题，进一步充实和发展房地产估价理论。文章对房地产估价基本方法与价格形成理论、房地产估价技术路线与估价方法、房地产估价目的与估价结果、房地产估价参数与替代原理、公开市场价值标准与估价结果等基本理论问题及其关系进行了初步研究。     

Do Laws Influence the Cost of Real Estate Brokerage Services? A State Fixed Effects Approach

A FTC‐DOJ study argues that state laws and regulations may inhibit the unbundling of real estate brokerage services in response to new technology. Our data show that 18 states have changed laws in ways that promote unbundling since 2000. We model brokerage costs as measured by number of agents in a state‐level annual panel vector autoregressive framework, a novel way of analyzing wasteful competition. Our findings support a positive relationship between brokerage costs and lagged house price and transactions. We find that change in full‐service brokers responds negatively (by well over two percentage points per year) to legal changes facilitating unbundling.     

ESTIMATING MARK‐UPS FROM PLANT‐LEVEL DATA*

Typical plant‐level data sets do not report quantities. This paper shows that estimating mark‐ups (price‐cost ratio) in product‐differentiated industries using deflated sales to proxy quantity is not appropriate due to unobserved price heterogeneity. This paper presents an econometric model for estimating mark‐ups that controls for unobserved prices. The model shows that ignoring price heterogeneity results in mark‐up estimates that converge to one, whatever the value of the true price‐cost ratio. Estimates obtained using real data are consistent with this result, as they reveal that ignoring price heterogeneity leads to spurious evidence of firms with little or no market power.     

Market Efficiency and Return Statistics: Evidence from Real Estate and Stock Markets Using a Present-Value Approach

This paper develops a methodology to identify asset price response to news in the framework of the Campbell–Shiller log-linear present-value equation. We further show that a slow price adjustment in real estate markets not only induces a high serial autocorrelation in excess returns, but also dampens the return volatility and the correlation with excess returns in other asset markets. Using Hong Kong real estate and stock market data, we find that the quarterly real estate price assimilates only about half the effect of market news, whereas the quarterly stock price incorporates the news fully. Our analysis identifies a cumulative price adjustment that recovers lost information in real estate returns due to market inefficiency and thereby restores the real estate return volatility and the correlation between real estate and stock markets.     

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.     

Real Estate Fund Openings and Cannibalization

This article examines the trade‐offs in launching new real estate funds, specifically open‐end, direct‐property funds. This investment vehicle, which is designed to provide the risk‐return benefits of private market real estate, is available to retail investors in a number of countries. At the same time, these funds are also subject to liquidity risk, because they hold an inherently illiquid asset in an open‐end structure. This format presents fund‐family managers with unique challenges, particularly with the decision to open new funds. The data consist of 2,127 German fund openings across 76 fund families in 12 asset classes over the 1992–2010 period. Including a wide range of asset classes allows for a comparison between real estate and other investment objectives. We find a substantial cannibalization effect across the existing real estate funds of a family, while we note the opposite effect—i.e., flows into existing funds increase following a fund opening within the same objective—for all other asset classes. Our analysis of fund opening determinants shows that inflows mitigate the cannibalization risk for new real estate funds. Additional evidence highlights the role of scale and scope economies in real estate fund openings. Overall, the results provide new insights into the relatively large size and small number of real estate funds when compared to mutual funds dedicated to other investment objectives.     

Graduated Flood Risks and Property Prices in Galveston County

Our hedonic property analysis approach in Galveston County, Texas aims at estimating the impacts of flood risks and water‐related amenities in a more systematic way. First, we interact distance to the nearest coastline and flood risk in order to account for these impacts acting together on housing sales prices in our coastal community. Second, we use more granular flood risk measure in the analysis compared to the existing literature. Results show that the hedonic price effect is dependent upon the distance to the nearest coastline, and as expected the distance effect varies by flood risk type. We find that in this coastal housing market properties located in the highest risk flood area, for up to nearly a quarter mile from the nearest coastline, actually command a price premium. A recent movement toward risk‐based flood insurance premiums in the United States was deeply opposed by the real estate sector for fear of causing property values to steeply decline. This analysis sheds some further light on this depressed property value assertion highlighting its sensitivity to distance to the water.     

The Gender Gap in Real Estate Sales: Negotiation Skill or Agent Selection?

This study examines differences in net selling price for residential real estate across male and female agents. A sample of 2,020 home sales transactions from Fulton County, Georgia, are analyzed in a two‐stage least squares, geospatial autoregressive corrected, semi‐log hedonic model to test for gender and gender selection effects. Although agent gender seems to play a role in naïve models, its role becomes inconclusive as variables controlling for possible price and time on market expectations of the buyers and sellers are introduced to the models. Clear differences in real estate sales prices, time on market and agent incomes across genders are unlikely due to differences in negotiation performance between genders or the mix of genders in a two‐agent negotiation. The evidence suggests an interesting alternative to agent performance: that buyers and sellers with different reservation price and time on market expectations, such as those selling foreclosure homes, tend to select agents along gender lines.     

Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty

This article theoretically and empirically analyzes the interactions among corporate real estate investment, product market competition and firm risk. In our model, firms own strategic real estate or lease generic real estate. Our model predicts that strategic real estate ownership is positively correlated with industry concentration and negatively related to demand uncertainty. Also, firm risk is higher for firms with more strategic real estate operating in a more concentrated market. This prediction arises because smaller investments induce greater market competition, which effectively eliminates the right tail of the firm's profit distribution. We provide strong empirical support for our predictions. In particular, firm value is more volatile in less competitive markets for a given level of demand uncertainty.     

Real Estate,the External Finance Premium and Business Investment: A Quantitative Dynamic General Equilibrium Analysis

This article studies the connection between the capital market and the real estate market. Empirically, we find that positive real house price shocks lower the external finance premium and stimulate nonresidential investment and real gross domestic product (GDP). Our theoretical framework is able to mimic the volatility of the external finance premium, the relative price of real estate and capital and the investment in real estate and capital. It also captures the cyclicality of the external finance premium and of real estate prices. The contribution of real estate price fluctuations to the variability of the external finance premium and the GDP is confirmed to be significant.     

Investor Confidence as a Determinant of China's Urban Housing Market Dynamics

China's urban housing market dynamics suggest that evolving investor confidence may be a relevant demand shifter. Such investors are continually updating their beliefs about the state of the macroeconomy and the policy uncertainty related to national and local housing policies. We build a 35 Chinese city real estate confidence index that varies over time and across cities. This index predicts subsequent house price appreciation and new housing sales. We document evidence of heterogeneous effects of investor confidence depending on a city's demographics and the city's elasticity of housing supply. Our results based on a new household‐level expectations survey bolster the case that investor expectations are an important determinant of real estate price dynamics.     

Unsmoothing Real Estate Returns: A Regime‐Switching Approach

We propose newly developed unsmoothing techniques for appraisal‐based real estate returns based on a regime‐switching threshold autoregressive (TAR) model. We show that when true returns follow a TAR process, conventional linear autoregressive techniques are misspecified and underestimate true variance. Two exogenous variables, equity returns and gross domestic product growth, outperform other variables as regime indicators and appear to capture risks of downturns in real estate. We extend the model to the smoothing equation, allowing for switching behavior by appraisers, using two new techniques: the TAR‐AR and TAR‐TAR approaches. The “co‐switching” specification opens up a new frontier of empirical research. We estimate the TAR‐TAR using FT returns as the regime indicator, and we find results that outperform conventional smoothing models and have plausible economic explanations.