Diversification Categories in Investment Real Estate

This paper continues previous work evaluating the benefits of diversification and analyzes the various dimensions within the commercial real estate opportunity set. The database is large and extends through the 1982 downturn in property values. Due to the low levels of systematic risk, current distinctions by region and property type make little sense in a world of costly diversification. More exacting categories combining property type, SMSA growth rate and lease maturity offer promise for more efficient diversification within the real estate portfolio.     

The Walkability Premium in Commercial Real Estate Investments

This article examines the effects of walkability on property values and investment returns. Walkability is the degree to which an area within walking distance of a property encourages walking for recreational or functional purposes. We use data from the National Council of Real Estate Investment Fiduciaries and Walk Score to examine the effects of walkability on the market value and investment returns of more than 4,200 office, apartment, retail and industrial properties from 2001 to 2008 in the United States. We found that, all else being equal, the benefits of greater walkability were capitalized into higher office, retail and apartment values. We found no effect on industrial properties. On a 100‐point scale, a 10‐point increase in walkability increased values by 1–9%, depending on property type. We also found that walkability was associated with lower cap rates and higher incomes, suggesting it has been favored in both the capital asset and building space markets. Walkability had no significant effect on historical total investment returns. All walkable property types have the potential to generate returns as good as or better than less walkable properties, as long as they are priced correctly. Developers should be willing to develop more walkable properties as long as any additional cost for more walkable locations and related development expenses do not exhaust the walkability premium.     

Heterogeneous Investor Sentiment and Institutional Real Estate Investments

Commercial real estate investors differ in their sentiment due to factors such as market expertise, investment strategies and expectations about future market conditions. Focusing on the office market, we investigate whether investors with a multiasset investment focus such as pension funds or insurance companies rely on the sentiment of specialized real estate investors such as public REITs or private developers/owners as source of information in their investment decision‐making. Using disaggregated sentiment measures and vector autoregression (VAR) we find evidence that changes in REIT and private real estate investor sentiment lead to changes in institutional investor sentiment in the suburban office and office REIT market. Our findings suggest that institutional investors rely on the sentiment of specialized real estate investors to make real estate investment decisions. Our study contributes to the existing literature on sentiment in commercial real estate markets by emphasizing the heterogeneity of investor sentiment and introducing a disaggregated sentiment measure. We also contribute to the institutional herding literature.     

Real Estate Returns: A Comparison with Other Investments

Real estate returns, measured unleveraged, have been between those of stocks and bonds over 1960–1982. Due to appraisal smoothing and imperfect marketability, one must be careful about directly comparing measured real estate returns with those on other assets. It is likely, however, that low correlations with stocks and bonds make real estate a diversification opportunity for traditional portfolio managers. In addition, the issue of how various assets are priced is addressed. While stocks are priced primarily on market or beta risk, and bonds are priced primarily on interest rate and default risk, the real estate pricing mechanism includes residual risk and non-risk factors such as taxes, marketability costs and information costs.     

Economic Depreciation of Residential Real Estate: Microlevel Space and Time Analysis

Three elements in the study of real estate depreciation that warrant further consideration are uncovered: the spatial variation of depreciation on a micro scale, the variability of depreciation within a single market across time and the recognition of land value as an influence in modeling real property prices. Taken together, these three dimensions provide an opportunity to further expand the understanding of residential economic depreciation while enhancing the predictive power of real estate market models. The analytical results, utilizing a land-value-adjusted hedonic model, indicate that both the intramarket location and the year in which the property sold have significant impacts on the observed rate of economic depreciation. Such information is vitally important to policymakers and others interested in accurate modeling of real estate markets.     

Assessing the Performance of Real Estate Auctions

This article investigates the performance of real estate auctions relative to negotiated sales. It uses a repeat-sales methodology to control for unobserved differences in the quality of auction properties. Properties auctioned in Los Angeles during the 1980s boom sold at an estimated discount of 0%–9%, while sales in Dallas following the oil bust obtained discounts of 9%–21%. This evidence is consistent with the theoretical prediction that the auction discount increases in downturns when a seller trades-off a longer expected selling time in a search market against an immediate auction sale. The study finds no evidence of the declining price anomaly.     

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.     

Incentive Problems and General Partner Compensation in Limited Partnership Real Estate Investments

When a general partner raises capital for a real estate syndication, prospective investors should price-protect against incentives of the general partner to misrepresent project cash flows. In this study, I evaluate the structure of the general partner's compensation and specific project characteristics to determine if compensation structure can mitigate agency costs. Results indicate that front-end compensation is higher for the high reputation general partner and that the compensation structure varies with the degree of management expertise required and the financial risks of the investment.     

Inflation and Real Estate Investment Value

It is demonstrated that the inflation rate must be reflected in the anticipated benefit flows used in investment value models. When flows are left unadjusted, a biased value estimate results. It is also shown that the actual effects of the inflation rate on investment value will depend on the relationships of original cost, the debt/equity ratio, and the level of depreciation expense. Inflation has a fundamentally negative impact on value traceable to capital gains and depreciation effects. This can be offset by the use of debt financing.     

Assessing the Market Value of Real Estate Property with a Geographically Weighted Stochastic Frontier Model

In this study we consider the problem of sellers, buyers and real estate appraisers in determining the price for a house, taking into account the characteristics of the house and its location as well as the goals of these three different parties. The appraiser's job is to determine the fair market value of the house, while the buyer and seller want to find, respectively, the lowest and highest feasible price for it. We combine recent developments in geography and econometrics to develop an approach that determines local estimates of property values from the perspectives of the buyer, seller and appraiser, taking into account the characteristics of the house as well as its location. We illustrate our approach analyzing closing prices in one residential real estate market.     

Public Real Estate Limited Partnership Returns: A Preliminary Comparison with Other Investments

Real Estate Limited Partnership (RELP) securities have attracted substantial investor interest, but limited research study. This paper, utilizing a very recent database of actual RELP secondary market transactions, provides preliminary evidence regarding the relative performance of RELP securities, as well as the interrelationships between RELP returns and the returns of Treasury bills and bonds and common stock. Results suggest that RELP returns are negatively correlated with common stock returns, but are positively correlated with the rate of inflation. RELP returns do not consistently exceed the rate of inflation nor do they exceed common stock returns. RELP returns also failed to outperform a broadly-based income property index.     

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.     

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.     

Tax Reform and the Value of Real Estate Income Property

This paper examines the effect of recent proposals for tax reform (Treasury I and Treasury II) on the tax benefits and value of real estate income property. The effect on tax benefits is measured by the effective tax rate, and the potential impact on value is measured by the capitalization rate (user cost). The analysis of Treasury I provides insight into the effect of a tax-neutral system on real estate since this proposal comes close to meeting the criteria of tax neutrality. The importance of debt in evaluating tax neutrality is also shown. The paper demonstrates that the interaction between tax law changes and the way interest rates adjust to inflation are critical to the conclusions.     

Risk and Return on Real Estate: Evidence from Equity REITs

We analyze monthly returns on an equally weighted index of eighteen to twenty-three equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973–87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs.
Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60% of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.     

关于房地产投资风险类型的研究

本借鉴了证券投资组合理论和资本资产定价模型的思想，将房地产投资风险划分为系统风险和非系统风险，并结合我国的实际情况，对房地产投资风险的类型进行了深入的研究。     

Anticipated Growth and the Specification of Debt in Real Estate Value Models

Standard value models for investment real property do not distinguish between current income and future growth in estimating the probable level of debt financing. Analysis of loan commitment data from 1971–1981 suggests that this was not a proper assumption during that period. Consistent with recent models from the literature of the firm, the portion of the value of investment properties attributable to anticipated growth apparently supported less dept than did current income.     

Prospective Changes in Tax Law and the Value of Depreciable Real Estate

The Economic Recovery Tax Act of 1981 significantly reduced the taxation of income-producing properties by accelerating tax depreciation on both new and, especially, existing properties. A partial reversal of the 1981 legislation appears likely. To provide some insight into the possible effects of a decrease in tax depreciation of income-producing properties, two potential tax changes are analyzed: an increase from fifteen to twenty years in the tax service lives of both new and existing properties and an increase for existing properties only. Both residential and commercial/industrial properties are considered.