Predictability in Equilibrium: The Price Dynamics of Real Estate Investment Trusts

This research hypothesizes that, in markets where information costs, transaction costs and the economic impact of information can vary widely, we should expect predictability to vary systematically. We test this hypothesis with data on equity real estate investment trusts (REITs) from 1985 to 1992. We document that levels of predictability vary with firm characteristics like leverage, size and focus. Momentum is stronger for larger, more levered REITs. Reversion is faster for focused, levered REITs. The results are consistent with the hypothesis that, in equilibrium, securities, where information is either less costly to acquire or has less impact on fundamental value, should exhibit less predictability.     

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.     

The Risk and Return of Commercial Real Estate: A Property Level Analysis

I compare the performance of the index‐based time series approach and the cross‐sectional approach in estimating factor loadings of nontraded assets, and show that the latter likely provides less biased and more efficient estimates. I then use the cross‐sectional approach to estimate the loadings of privately owned commercial real estate on the Fama and French (1993) factors, the Pastor and Stambaugh (2003) liquidity factor, and two bond market factors, using a sample of 14,115 properties in the 1977–2012 period. I find statistically significant loadings, of which the signs seem consistent across property types, but the magnitude varies. Using the time series approach on the same data, I find insignificant loadings on virtually all factors. To investigate the sources of the weak results from the time series approach, I conduct a Monte Carlo simulation in which both approaches are correctly specified and indices can be estimated perfectly. Simulation results suggest that the cross‐sectional approach provides more accurate estimates under reasonable market conditions.     

Inferring an Investment Return Series for Real Estate from Observations on Sales

Accurate measurement of the returns to real estate investment are essential to sound analysis. This paper improves upon the traditionally employed method—collecting comparable sales data. A dynamic model of real estate appraisal is developed in which agents have incomplete information, heterogeneous search costs, and varying expectations. Various types of simulation analysis of the model indicate it performs best in the sense that the return estimate converges to the true value faster than other simpler rules.     

The Predictability of International Real Estate Markets, Exchange Rate Risks and Diversification Consequences

International real estate related securities are investigated to see whether they offer any incremental diversification benefits over foreign stocks using mean-variance analysis together with a multifactor latent variable model. Diversification benefits are found to be primarily driven by unanticipated returns which are partially driven by changes in exchange rate risk. Although exchange rate risk accounts for a larger portion of the return fluctuation in real estate related securities relative to common stocks, international real estate securities provide some incremental diversification benefits over common stocks even if currency risks are hedged.     

Determinants of the Rate of Return for Nonresidential Real Estate: Inflation Expectations and Market Adjustment Lags

This paper analyzes the economic forces that determine the real rate of return for nonresidential real estate. Our analysis shows that the intermarket variation in the real rate of return is statistically significant, and the rate of return differs by land use and market area, as well as over time in response to changes in macro-economic conditions. We use inflation variables as surrogates for changes in macroeconomic conditions over time. In contrast to earlier studies, we find that nonresidential real estate may not outperform expected inflation. We believe that the impact of expected inflation (and other macroeconomic variables) on real estate rates of return depends upon the interaction of the macro-environment and specific local real estate market conditions. Finally, our empirical evidence suggests that the effects of a given shock dissipate rather quickly in most markets when we take into account locational and property use differences.     

The Disciplining Effect of Concern for Referrals: Evidence from Real Estate Agents

Real estate agents rely on clients for referrals to generate future business; this article examines whether concern for referrals disciplines agents. We compare results for sellers who move to another area (and are less likely to provide referrals) with results for sellers who remain in the area (and are more likely to provide referrals). We find that moving‐away sellers’ houses have a higher sale rate, sell faster and sell for less (even after controlling for moving‐away sellers’ greater impatience). We also provide evidence that the disciplining effect of concern for referrals is stronger for agents who place a greater value on reputation. Finally, among sellers who are better at evaluating and monitoring agents, we see less of the high sell rate, low sale‐price effect.     

The Effect of State Licensing Regulations on the Real Estate Brokerage Industry

An argument is often made that occupational licensure protects members of the regulated industry by limiting supply and raising earnings. The purpose of this study is to examine entry barriers within the real estate brokerage industry and to determine the effect of differing state entry requirements on the supply of practitioners, earnings, and quality of service provided. A simultaneous system of equations is developed where the number of licensees per capita, earnings, and quality are jointly estimated. Two-stage least squares results support the premise that the consumer rather than the industry benefits from real estate prelicensing regulation with a higher quality of service. Significant evidence is not found to support the idea that the real estate industry regulations are self-serving.     

The Effect of Corporate Governance on Investment: Evidence from Real Estate Investment Trusts

This study investigates the relation between firms' investment choices and various governance mechanisms, using a sample of real estate investment trusts (REITs). We find evidence that the responsiveness of REITs' investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin's q if they have greater institutional ownership or if they have lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm's investment policies as well as with high insider ownership allowing managers to follow their own investment agendas.     

The Economics of Maintenance for Real Estate Investments

We propose a theory of urban decay. Following a negative real estate demand shock, property managers optimally suspend maintenance and the probability that they ever restart can be modest. Because maintenance expenditures are proportionately less risky than are the incremental building profits they generate, managers impose a more demanding profit standard on maintenance than on the initial investment. This differential in profit standards means that rather than maintain existing investments, property managers favor new investments, which, if marginally acceptable, they also leave unmaintained. Contractually required maintenance ( e.g ., for publicly subsidized real estate investments), increases the minimum profit for the initial investment acceptance and discourages subsidized real estate investments in favor of unsubsidized investments. However, the required profit for acceptance of a permanently maintained investment is below the profit boundary for maintenance if maintenance is not contractually required. Consequently, the subsidy that induces the investment is least expensive if maintenance is not required, more expensive if maintenance is permanently required and most expensive if maintenance is induced immediately after initial construction but thereafter is at the discretion of the manager. All of our findings are strongest for poorer quality properties.     

A Further Examination of Appraisal Data and the Potential Bias in Real Estate Return Indexes

Recent articles by Giliberto [2] and Geltner [1] examine the biases inherent in the use of appraisal data in real estate performance measurement. This note takes another look at the direction and magnitude of any bias in holding period returns. Using appraisal data from a commingled real estate fund, we show that in actual application the size of the holding period return bias can be quite small and this bias may have no appreciable effect on real estate return indexes.     

The Substitutability of Real Estate Assets

This paper investigates the degree of substitutability between securitized real estate assets and real estate assets whose prices are appraisal-based. Given the insensitivity of unsecuritized asset's returns to the returns on stock market indices, equilibrium asset pricing models cannot be used to compare these two avenues of investment. Two assets are deemed substitutable if the information sets underlying unbiased, minimum error variance estimates of their pricing parameters are identical. The empirical evidence shows that the prices of the transactions-based assets—real estate investment trusts and the stock price index of the home building industry—follow a random walk while the prices of the appraisal-based assets—FRC/NCREIF indices—do not. The variance decompositions of the vector autoregressions also show that the level of economic activity helps predict the price indices of appraisal-based assets while the stock market index and the term structure of interest rates are better predictors of the prices of transactions-based assets     

A Further Examination of Appraisal Data and the Potential Bias in Real Estate Return Indexes: Comment and Clarification

This comment points out a flaw in Gau and Wang's recent empirical analysis of appraisal return bias and clarifies a point in Geltner's previous article that may have misled Gau and Wang as well as others. In examining appraisal bias in returns it is important to distinguish between cross-sectional versus time-series moments. In dealing with time-series data, both the arithmetic mean and the geometric mean returns offer useful information and can complement each other in correcting for appraisal bias in the first moment of returns series.     

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.     

The Real Estate Brokerage Market: A Critical Reevaluation

This paper presents an analysis of the theories and evidence regarding the structure and performance of the market for real estate brokerage services. Some of the theoretical models found in the literature appear to suffer from logical inconsistencies, while others lack empirical support for their underlying assumptions and/or their predictions of market inefficiencies. Moreover, several important legal and institutional changes that have occurred recently have not been given sufficient attention in the existing literature.
Although some new evidence on this market is presented here, additional empirical research is warranted in at least two areas: the current pricing structure and the underlying production and cost functions of the real estate brokerage industry.     

The Timeline Estimation of Bubbles: The Case of Real Estate

We develop and then apply a new recursive regression methodology with a two‐direction searching process for initialization. The methodology improves the reliability of existing models when estimating a bubble's timeline. We apply our proposed methodology to estimate bubbles in U.S. home prices as well as in simulated scenarios. Our results confirm the improvement in reliability of the proposed methodology in obtaining consistent estimators with varying samples. Moreover, we verify the presence of bubbles in the U.S. aggregate data and seven of the eight cities in our study prior to the subprime crisis and find evidence of the bubble's reemergence since October 2013.     

The Land Development Corporation: A System for Selling Rural Real Estate

This research illustrates ways in which rural real estate is converted into potential vacation home sites by large land development corporations. The individual and previously disorganized approach to selling property is replaced by an organized framework that is designed to create a demand for rural real estate.
Unfortunately, development is progressing without serious or adequate consideration being given to a number of specific problems. Developers and local governmental officials often fail to consider the environmental impact of these developments, the adequacy of service facilities being provided or the direct and indirect public costs associated with this type of developmental activity. Because of these shortcomings and others, serious questions arise concerning the desirability of this kind of developmental activity for rural areas.