The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage

Purpose This study aims to assess the impact of location on capitalization rates and risk premia. Design/methodology/approach Using a transaction-based data series for the five largest office markets in Germany from 2005 to 2015, regression analysis is performed to account for a large set of asset-level drivers such as location, age and size and time-varying macro-level drivers. Findings Location is found to be a key determinant of cap rates and risk premia. CBD locations are found to attract lower cap rates and lower risk premia in three of the five largest markets in Germany. Interestingly, this effect is not found in the non-CBD locations of these markets, suggesting that the lower perceived risk associated with these large markets is restricted to a relatively small area within these markets that are reputed to be safe investments. Research limitations/implications The findings imply that investors view properties in peripheral urban locations as imperfect substitutes for CBD properties. Further analysis also shows that these risk premia are not uniformly applied across real estate asset types. The CBD risk effect is particularly pronounced for office and retail assets, apparently considered “prime” investments within the central locations. Originality/value This is one of the first empirical studies of the risk implications of peripheral commercial real estate locations. It is also one of the first large-scale cap rate analyses of the German commercial real estate market. The results demonstrate that risk perceptions of investors have a distinct spatial dimension.

Download Full-text

Do cross-border investors benchmark commercial real estate markets?

Journal of European Real Estate Research ◽

10.1108/jerer-10-2019-0032 ◽

2020 ◽

Vol 13 (1) ◽

pp. 83-103

Author(s):

Cay Oertel ◽

Jonas Willwersch ◽

Marcelo Cajias

Keyword(s):

Relative Risk ◽

Real Estate ◽

Risk Premia ◽

Commercial Real Estate ◽

Target Market ◽

Nonlinear Relationship ◽

Content Type ◽

Real Estate Markets ◽

Cross Border ◽

Relative Attractiveness

Purpose The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target market. So far, the literature has analyzed only absolute measures of investment attractiveness as determinants of cross-border investment flows. Design/methodology/approach The empirical study uses a classic ordinary least squares estimation for a European panel data set containing 28 cities in 18 countries, with quarterly observations from Q1/2008 to Q3/2018. After controlling for empirically proven explanatory covariates, the model is extended by the new relative measurement based on relative yields/cap rates and relative risk premia. Additionally, the study applies a generalized additive mixed model (GAMM) to investigate a potentially nonlinear relationship. Findings The study finds on average a ceteris paribus, statistically significant lagged influence of the proxy for relative attractiveness. Nonetheless, a differentiation is needed; relative risk premia are statistically significant, whereas relative yields are not. Moreover, the GAMM confirms a nonlinear relationship for relative risk premia and cross-border transaction volumes. Practical implications The results are of interest for both academia and market participants as a means of explaining cross-border capital flows. The existing knowledge on determinants is expanded by relative market attractiveness, as well as an awareness of nonlinear relationships. Both insights help to comprehend the underlying transaction dynamics in commercial real estate markets. Originality/value Whereas the existing body of literature focuses on absolute attractiveness to explain cross-border transaction activity, this study introduces relative attractiveness as an explanatory variable.

Download Full-text

Features of Retail Real Estate Market Dynamics in the North-Caucasian Region

Scientific Research and Development Economics of the Firm ◽

10.12737/2490 ◽

2014 ◽

Vol 2 (3) ◽

pp. 19-23

Author(s):

Моргунова ◽

Yelyena Morgunova

Keyword(s):

Economic Development ◽

Real Estate ◽

Essential Role ◽

Real Estate Market ◽

Commercial Real Estate ◽

The Other ◽

The North ◽

Regional Market ◽

Real Estate Sector ◽

Great Development

The commercial real estate market has a great development potential in this country. The author evaluates current developments at the regional market of retail real estate and its specifics inherent to the Southern Regions of Russia. Domestic market plays an essential role in the national economy, as a crucial factor of the of economic development pace. In many regions the commercial real estate sector demonstrates the highest development rates as compared to the other sectors of economy. The commercial real estate sector is also considered as the most attractive for investments. These factors emphasize the urgency of the presented research.

Download Full-text