How Do Institutional Factors Affect International Real Estate Returns?

Prior international real estate studies recognize the importance of country-specific factors for explaining real estate security returns. Using firm level observations from the FTSE NAREIT/EPRA Index for 2004?C2006, we construct a set of multifactor multivariate statistical regression models to identify and pin-point country-specific institutional features that determine differences for excess real estate security returns. Our analyses indicate that the excess real estate returns (i.e., required risk premiums) are, in part, determined by the quality of a country??s legal system and the corporate governance environment, controlling for various country-specific macro-economic variables and firm-level characteristics. We further find that the impact of institutional factors on international real estate returns is more prominent in the Asia-Pacific Region, and recent development of the REIT structure across the world does not alter the importance of corporate governance and legal system quality for determining real estate returns.     

Foreign Investment in Emerging Markets: International Diversification or Familiarity Bias?

This study empirically tests whether foreign investors take advantage of international diversification when investing in emerging Asian markets. Using the 2007–2008 financial crisis as identification, we find that firms with higher foreign ownership had better stock returns during the financial crisis. Moreover, the diversification effect exists in five out of the eight emerging markets and is stronger in markets with a lower dynamic conditional correlation with the global market index. We also find that foreign investors prefer firms with a lower international sales ratio. In conclusion, the evidence consistently suggests that foreign investors take advantage of diversification effects.     

What Is Real Estate Finance?

The Journal of Real Estate Finance and Economics - How does real estate finance relate to the core of contemporary finance? What research in real estate might most interest financial economists?...     

List Price Information in the Negotiation of Commercial Real Estate Transactions: Is Silence Golden?

We examine the use (and non-use) of list price information in the process of marketing commercial real estate. While housing market research suggests that list prices can serve as a strong anchor and/or signal, list price information is included in less than one-third of the commercial property sales and is less likely to be included as part of the sellers’ offering information for larger and more complex properties. Given the potentially powerful effect of list prices (first offers) on outcomes, the non-use of list price information is a puzzle. We speculate that the limited use of list prices may be due to the sellers’ interests in both maintaining their informational advantage and not truncating higher than expected offers, especially during periods of economic growth or with more complex properties. Using a two-stage selection correction model, we find that office properties which provide list price information are, on average, associated with lower price outcomes (ceteris paribus) and that these outcomes vary by price cohort and economic condition. It is important to note, however, that while these findings identify a correlation, they do not necessarily imply causation. Our results support the notion that asymmetric information and information signaling play a dominant role in explaining the sellers’ strategic non-use of list price information in the commercial real estate market and that the signaling effect is more pronounced in higher priced properties and during periods of strong economic growth.     

Does the Diversification Potential of Securitized Real Estate Vary Over Time and Should Investors Care?

This paper examines the dynamics of the covariance matrix of return rates for securitized real estate, other company stocks, and government bonds for a cross-section of eight countries. In-sample analysis establishes that in all countries the covariance matrix is time-varying and reacts stronger to bad than to good news. Using a realistic out-of-sample exercise, we find that portfolios selected with a forecasted dynamic covariance matrix are less risky than portfolios constructed with the static matrix. However, benefits of using the dynamic covariance matrix for active portfolio management are mostly offset by rebalancing cost. Passive buy-and-hold investors benefit, because the forecasted dynamic covariance matrix provides better risk assessment.     

Do Unexpected Land Auction Outcomes Bring New Information to the Real Estate Market?

Land and real estate are intrinsically related but generally traded in two different markets. Vacant land, being a major “raw material” for development of real estate, is traded by developers who actively manage development risk for profit. Real estate, being a long lived final product, is traded by end-users or investors for use or investment in the secondary market. This study examines price discovery between the two markets. The key question is whether land transactions, in the form of public auctions, convey any new information to the secondary real estate market. Our results suggest unexpected land auction outcomes have both market-wide and local effects on real estate prices. However, the impacts are asymmetric. We found that lower than expected land auction prices have a significant negative market-wide and local impact on real estate prices while higher than expect land auction prices have little or no impact.     

Paying for a Name? Comparing the Performance of Franchised Real Estate Brokerage Firms

The Journal of Real Estate Finance and Economics - This paper compares the relative performance of franchised and independent real estate brokerage firms. One problem that arises when comparing the...     

Are Government Owned Investment Funds Created Equal? Evidence from Sovereign Wealth Fund Real Estate Acquisitions

The Journal of Real Estate Finance and Economics - Sovereign Wealth Funds (SWFs) are an institutional investor class about which relatively little is known. Even though they have trillions of...     

Why Do Mutual Fund Advisory Contracts Change? Performance,Growth, and Spillover Effects

We examine changes in equity mutual funds' investment advisory contracts. We find substantial advisory compensation rate changes in both directions, with typical percentage fee shifts exceeding one‐fourth. Rate increases are associated with superior past market‐adjusted performance, whereas rate decreases reflect economies of scale associated with growth, and are not associated with extreme poor performance. There are within‐family spillover effects. Superior (e.g., star) performance for individual funds is associated with rate increases for a family's other funds. Rate reductions post‐2004 by family funds involved in market timing scandals do not have large industry spillover effects.     

Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance

We examine whether mutual fund performance is related to characteristics of fund managers that may indicate ability, knowledge, or effort. In particular, we study the relationship between performance and the manager's age, the average composite SAT score at the manager's undergraduate institution, and whether the manager has an MBA. Although the raw data suggest striking return differences between managers with different characteristics, most of these can be explained by behavioral differences between managers and by selection biases. After adjusting for these, some performance differences remain. In particular, managers who attended higher-SAT undergraduate institutions have systematically higher risk-adjusted excess returns.     

Industrial Real Estate Investment: Does the Contrarian Strategy Work?

The superiority of the contrarian investment strategy, though well attested to in the finance literature, has received scant attention, if any, in the real estate literature. This study uses empirical industrial real estate investment return data from 1985Q1 to 2005Q3 for the US, and some Asia Pacific cities in order to ascertain the relative superiority of “value” and “growth” industrial real estate investments. The results show that “value” industrial property investment outperformed “growth” industrial property investment in all the holding periods under consideration. Furthermore the industrial property investments exhibit return reversal. This implies that the superiority of the contrarian strategy is sustainable. The results of stochastic dominance tests validate the relative superiority of “value” over “growth” industrial property investment. This implies that fund managers who traditionally have been favoring prime (i.e. growth) industrial property investment may have to reconsider their investment strategy if they want to maximize their return.     

Is Money Smart? A Study of Mutual Fund Investors' Fund Selection Ability

A previous study finds evidence to support selection ability among active fund investors for equity funds listed in 1982. Using a large sample of equity funds, I find evidence that funds that receive more money subsequently perform significantly better than those that lose money. This effect is short-lived and is largely but not completely explained by a strategy of betting on winners. In the aggregate, there is no significant evidence that funds that receive more money subsequently beat the market. However, it is possible to earn positive abnormal returns by using the cash flow information for small funds.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm’s Real Estate Holdings?

Little is known about the effects of real estate ownership and leasing on the stock return characteristics of public firms. In this study, we first examine the sensitivity of retail firm returns to a real estate factor over the period 1998?C2008. The retail industry is chosen because of the significant use of real estate in a typical retail firm??s production function. Consistent with our expectations, retail stocks exhibit positive real estate risk exposure, even after controlling for sensitivity to general market risk as well as other standard risk factors. The second part of our analysis examines whether the intensity of real estate ownership and the use of off-balance operating leases to finance real property holdings are reflected in the market and real estate betas of retail stocks. We find that greater use of off-balance sheet operating leases is associated with higher market betas. In fact, the use of operating leases appears to have a larger impact on sensitivity to market risk than does the use of on-balance sheet debt. Our findings also confirm our hypothesis that real estate intensive firms display significantly greater exposure to a real estate factor. Moreover, our results strongly suggest that investors are fully aware of the risk associated with off-balance sheet operating leases.     

The Client Is King: Do Mutual Fund Relationships Bias Analyst Recommendations?

This paper investigates whether the business relations between mutual funds and brokerage firms influence sell‐side analyst recommendations. Using a unique data set that discloses brokerage firms’ commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst's recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst's brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client's portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias toward a client's existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and, in the long run, for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business‐related analysts. In addition, we find that, subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.     

The Only Fund in Town? Geographic Segmentation in the US Mutual Fund Industry

We find that mutual funds located in regions with more competing funds charge lower management fees, but higher fees related to sales and distribution (12b‐1 fees), sales loads, and other nonmanagement fee expenses. There is some evidence that funds in more competitive regions have higher total expense ratios than similar funds in less competitive regions. Our results indicate that while increased competition drives down fund profits, it creates a negative externality by way of increased sales expenses. Overall, our results suggest the mutual fund industry is characterized by monopolistic competition determined at the local level.     

Why Do Fund Families Release Underperforming Incubated Mutual Funds?

Although the average incubated mutual fund outperforms nonincubated funds by up to 3.41% annually, a large number of released funds underperform during incubation. We find that launching underperforming incubated mutual funds is associated with objectives that attract large inflows and lower relative risk. These findings are consistent with the use of incubation to maximize fee revenue through means other than the flow‐to‐performance relationship. We also find that underperforming incubated funds are incubated longer suggesting that families release funds opportunistically to take advantage of outperformance when it is observed.     

Is Financial Regulation Good or Bad for Real Estate Companies? – An Event Study

The Journal of Real Estate Finance and Economics - This study investigates how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns of real...     

How Are Derivatives Used? Evidence from the Mutual Fund Industry

We investigate investment managers' use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives. In contrast to public perception, derivative users have risk exposure and return performance that are similar to nonusers. We also analyze changes in fund risk in response to prior fund performance. Changes in risk are substantially less severe for funds using derivatives, consistent with the explanation that managers use derivatives to reduce the impact of performance on risk. We provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk.     

Is the Compensation Model for Real Estate Brokers Obsolete?

This study examines the traditional compensation model for real estate brokers under which both the listing and buyer brokers are paid by the seller based on a percentage of the property sales price. We argue that this model has not evolved to reflect contemporary legal agency relationships and technology-driven information availability. It therefore creates substantial transactional inefficiencies for buyers and sellers at both the matching and bargaining stages of a transaction. While there is evidence that market forces are pushing for a change in the status quo, there is also evidence that the brokerage industry is resisting this change by pursuing anti-competitive policies and laws. We explore the economics of the current and alternative compensation structures and suggest policy implications regarding anti-competitive behavior in the brokerage industry.