An assessment of the risk and return of residential real estate

2015 ◽  
Vol 41 (6) ◽  
pp. 591-599 ◽  
Author(s):  
Dale Domian ◽  
Rob Wolf ◽  
Hsiao-Fen Yang
Keyword(s):  
Asset Pricing ◽  
Real Estate ◽  
Risk Premium ◽  
Real Estate Market ◽  
Individual Investors ◽  
Residential Real Estate ◽  
Risk And Return ◽  
Content Type ◽  
Market Risk Premium ◽  
Substantial Investment

Purpose – The home is a substantial investment for most individual investors but the assessment of risk and return of residential real estate has not been well explored yet. The existing real estate pricing literature using a CAPM-based model generally suggests very low risk and unexplained excess returns. However, many academics suggest the residential real estate market is unique and standard asset pricing models may not fully capture the risk associated with the housing market. The purpose of this paper is to extend the asset pricing literature on residential real estate by providing improved CAPM estimates of risk and required return. Design/methodology/approach – The improvements include the use of a levered β which captures the leverage risk and Lin and Vandell (2007) Time on Market risk premium which captures the additional liquidity risk of residential real estate. Findings – In addition to presenting palatable risk and return estimates for a national real estate index, the results of this paper suggest the risk and return characteristics of multiple cities tracked by the Case Shiller Home Price Index are distinct. Originality/value – The results show higher estimates of risk and required return levels than previous research, which is more consistent with the academic expectation that housing performs between stocks and bonds. In contrast to most previous studies, the authors find residential real estate underperforms based on risk, using standard financial models.

A prolonged financial crisis: adjustments and prospects in Eurozone's southern markets

2014 ◽  
Vol 32 (1) ◽  
pp. 94-102 ◽  
Author(s):  
Sotiris Tsolacos
Keyword(s):  
Real Estate ◽  
Risk Premium ◽  
Real Estate Market ◽  
Growth Potential ◽  
Data Series ◽  
Structural Reforms ◽  
Investment Activity ◽  
Content Type ◽  
The Future ◽  
Business Confidence

Purpose – The economic slump in the southern member states of the Eurozone has brought real estate market activity to a standstill and has raised questions about the future of these markets. Will they rebound and will they command a higher risk premium? This paper aims to assess the outlook for these markets as the crisis continues and analyses the conditions that are a prerequisite to restore investment activity and a healthy occupier market. Design/methodology/approach – Within a portfolio allocation framework, the paper examines the conditions for the revival of investor interest in these markets and the uncertainties that should be resolved. Through the analysis of selected data, the paper assesses the emerging state of these markets. Findings – The economic slump in peripheral Eurozone economies gives way to a period of slow growth and ongoing structural reforms. The latter are necessary to restore confidence in the respective economies and investment markets. Sentiment indicators contain the first signs of a rebound in business confidence. With confidence returning and mitigated macroeconomic risks investors will seek value in the markets of the southern region on a selective basis. Price corrections and yield differentials with core markets could prove attractive. It is, however, argued that a risk premium will remain to reflect progress with structural reforms that will make the economies more competitive and less prone to a similar crisis in the future. It is only when such reforms will firmly be put in place that pricing in the southern Eurozone markets will reflect cyclical risks and diversification contributions. Practical implications – The article provides a structured approach to assess the outlook for peripheral markets. It identifies the key risks affecting investor confidence. The analysis proceeds to stress conditions that should be satisfied for a rebound in the investment market. Signals from selected data series are extracted to assess sentiment and adjustment in the market and assist in the assessment of real estate market prospects in these economies. Originality/value – The paper examines conditions for investing in the hard hit markets of the Eurozone. It illustrates the path for the recovery in these markets and the conditions for the rebound in investment volumes. It contributes to the analysis of the growth potential and risk of these markets for investment purposes.

The effect of leverage on the performance of real estate companies

2018 ◽  
Vol 11 (3) ◽  
pp. 284-318 ◽  
Author(s):  
Giacomo Morri ◽  
Karoline Jostov
Keyword(s):  
Real Estate ◽  
Risk Premium ◽  
Market Risk ◽  
Local Market ◽  
Cross Sectional ◽  
Content Type ◽  
Crisis Period ◽  
Market Risk Premium ◽  
Fama And French ◽  
The Impact

Purpose This paper aims to investigate the impact of leverage on the total shareholder return of European publicly traded real estate vehicles in three periods: Crisis Period (2007-2009), Rebound Period (2009-2014) and the Whole Period. Design/methodology/approach Cross-sectional analysis is used and the leverage effect on the performance is controlled for seven other independent variables (local market risk premium, size, book-to-market, short-term debt, cash); moreover, regional differences are accounted for. Findings It is established that during the Crisis Period, leverage levels are negatively associated with performance: this relationship also holds throughout the Whole Period, implying that for real estate securities, the cost of financial distress is larger than the potential gain from taxation, although the economic significance of it is limited. The Fama and French (1992) three factors, including size, book-to-market and local market risk premium, are found to be relevant, which is consistent with the literature. In addition, the UK and Sweden regions are identified as significant. Originality/value Even if there is sizeable body of literature on determinants of leverage and determinants of asset returns, little work has been done on how leverage affects the returns of European real estate companies. In addition, this paper takes advantage of observations from a full economic cycle and the possible effects of the crisis period.

scholarly journals Changes in Housing Availability Indicator in Selected Polish Cities in the Years 2006 to 2018

2019 ◽  
Vol 16 (1) ◽  
pp. 91-97
Author(s):  
Marta Martyniak
Keyword(s):  
Real Estate ◽  
Housing Market ◽  
Housing Prices ◽  
Real Estate Market ◽  
Secondary Market ◽  
Individual Investors ◽  
Residential Real Estate ◽  
Asymmetry Of Information ◽  
Transaction Prices ◽  
Central Statistical

Abstract Research purpose. Housing availability indicator shows the area of residential real estate possible to purchase for the average monthly wage in the enterprise sector. The research carried out in this paper is aimed at determining the current level of housing availability indicator and its detailed analysis, taking into account the dynamics of changes in 2006 to 2018. This analysis will be carried out for primary and secondary market for selected Polish cities. Design/Methodology/Approach. Calculations were based on the average transaction prices obtained from the transactional database of residential real estate of the National Bank of Poland and the value of the average monthly remuneration in the enterprise sector obtained partly from statistical data and official journals of the Central Statistical Office. Findings. The analysis shows that the indicator of housing availability in Poland, despite the visible upward trend, is at a very low level, placing Warsaw at the first place. In addition, the extension of the analysis to the division of the housing market into the primary and secondary market provided more information about shaping the housing availability indicator. Whereas in the primary market in individual cities its value was at a similar level, the secondary market was subject to greater fluctuations. Originality/Value/Practical implications. This paper is of practical nature. Due to the asymmetry of information on the Polish real estate market, especially regarding housing prices, knowledge about the value of the housing availability indicator in Poland may be exceptionally valuable, especially for people interested in the housing market, including individual investors and market practitioners, as an auxiliary source of information in purchasing decisions of households.

Pricing office rents in Sydney CBD: testing the water on automated rent reviews

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Olga Filippova ◽  
Jeremy Gabe ◽  
Michael Rehm
Keyword(s):  
Asset Pricing ◽  
Real Estate ◽  
Percentage Error ◽  
Residential Real Estate ◽  
Pricing Models ◽  
Content Type ◽  
Market Rent ◽  
Absolute Percentage Error ◽  
Asset Pricing Models ◽  
Out Of Sample

PurposeAutomated valuation models (AVMs) are statistical asset pricing models omnipresent in residential real estate markets, where they inform property tax assessment, mortgage underwriting and marketing. Use of these asset pricing models outside of residential real estate is rare. The purpose of the paper is to explore key characteristics of commercial office lease contracts and test an application in estimating office market rental prices using an AVM.Design/methodology/approachThe authors apply a semi-log ordinary least squares hedonic regression approach to estimate either contract rent or the total costs of occupancy (TOC) (“grossed up” rent). Furthermore, the authors adopt a training/test split in the observed leasing data to evaluate the accuracy of using these pricing models for prediction. In the study, 80% of the samples are randomly selected to train the AVM and 20% was held back to test accuracy out of sample. A naive prediction model is used to establish accuracy prediction benchmarks for the AVM using the out-of-sample test data. To evaluate the performance of the AVM, the authors use a Monte Carlo simulation to run the selection process 100 times and calculate the test dataset's mean error (ME), mean absolute error (MAE), mean absolute percentage error (MAPE), median absolute percentage error (MdAPE), coefficient of dispersion (COD) and the training model's r-squared statistic (R2) for each run.FindingsUsing a sample of office lease transactions in Sydney CBD (Central Business District), Australia, the authors demonstrate accuracy statistics that are comparable to those used in residential valuation and outperform a naive model.Originality/valueAVMs in an office leasing context have significant implications for practice. First, an AVM can act as an impartial arbiter in market rent review disputes. Second, the technology may enable frequent market rent reviews as a lease negotiation strategy that allows tenants and property owners to share market risk by limiting concerns over high costs and adversarial litigation that can emerge in a market rent review dispute.

scholarly journals VARIÁVEIS QUE EXPLICAM O RETORNO DOS FUNDOS IMOBILIÁRIOS BRASILEIROS

2020 ◽  
Vol 9 (1) ◽  
pp. 17-33
Author(s):  
Janaína Morais de Oliveira ◽  
Bruno Milani
Keyword(s):  
Real Estate ◽  
Stepwise Regression ◽  
Structural Break ◽  
Real Estate Market ◽  
Commercial Real Estate ◽  
Residential Real Estate ◽  
Real Estate Investment ◽  
Investment Funds ◽  
Risk And Return ◽  
Explanatory Variables

Este artigo tem o objetivo de analisar o risco e o retorno do Fundos Imobiliários Brasileiros no período de janeiro de 2012 até dezembro de 2017. Para isso, foi adotada a metodologia da regressão stepwise, com a finalidade de compreender a influência de cada uma das variáveis explanatórias sobre a variável dependente IFIX, que serve como proxy para os Fundos Imobiliários. Como variáveis explicativas, foram utilizados diversos índices macroeconômicos e de mercado. Os resultados apontaram que o Índice Ibovespa é a única variável que explica o retorno dos Fundos Imobiliários quando a amostra é analisada em toda sua extensão. Porém, foi verificado também que há uma quebra estrutural, a partir da qual a locação de imóveis comercias e a venda de imóveis residenciais passa a explica-los.Palavras-Chave: Fundos de Investimento Imobiliário. Mercado Imobiliário. Bolsa de Valores. VARIABLES THAT EXPLAIN THE RETURN OF BRAZILIAN REAL ESTATE FUNDSAbstract: This article aims to analyze the risk and return of Brazilian Real Estate Funds from January 2012 to December 2017. For this purpose, the stepwise regression methodology was adopted, in order to understand the influence of each on the variable IFIX, which serves as a proxy for Real Estate Funds. As explanatory variables, several macroeconomic and market indices were used. The results showed that the Ibovespa Index is the only variable that explains the return of Real Estate Funds when the sample is analyzed to its full extent. However, it was also found that there is a structural break, from which the rental of commercial real estate and the sale of residential real estate explains them.Keywords: Real Estate Investment Funds. Real Estate Market. Stock Market.

Does asset liquidity matter? Evidence from real estate stock markets

2015 ◽  
Vol 8 (3) ◽  
pp. 220-242 ◽  
Author(s):  
Alexander Scholz ◽  
Karim Rochdi ◽  
Wolfgang Schaefers
Keyword(s):  
Asset Pricing ◽  
Real Estate ◽  
Risk Premium ◽  
Investment Strategy ◽  
Time Series Regression ◽  
Underlying Asset ◽  
Content Type ◽  
Low Degree ◽  
Asset Liquidity ◽  
The Impact

Purpose – The purpose of this paper in this context is to examine the impact of asset liquidity on real estate equity returns, after taking well-documented systematic risk factors into account. Due to their unique characteristics, real estate equities constitute an inherently low degree of underlying asset liquidity. Design/methodology/approach – Following the Fama-French time-series regression approach, the authors extend the conventional asset pricing model by a real estate-specific asset liquidity factor (ALF), using a sample of 244 real estate equities. Findings – The results, based on monthly data for the period 1999-2012, reveal that asset liquidity is a relevant pricing factor which contributes to explaining return variations in real estate equity markets. Accordingly, investors expect a risk premium from listed real estate companies with a low degree of asset liquidity, which is especially the case for companies facing financial constraints and during economic downturns. Furthermore, an investment strategy exploiting differences in the underlying asset liquidity yields considerable average excess returns of upto 8.04 per cent p.a. Practical implications – Considering the findings presented in this paper, asset liquidity should receive special attention from investors, as well as from the management boards of listed real estate companies. While investors who ignore the magnitude of asset liquidity may systematically misprice real estate equities, management can influence the firm’s cost of capital by adjusting the underlying asset liquidity. Originality/value – This is the first study to examine the role of an ALF in a real estate asset pricing framework.

The dynamics of risk premium: the case of the Taiwan real estate market

2015 ◽  
Vol 16 (4) ◽  
pp. 463-482 ◽  
Author(s):  
Vijay Kumar Vishwakarma
Keyword(s):  
New York ◽  
Real Estate ◽  
Risk Premium ◽  
Real Estate Market ◽  
Information Environment ◽  
Time Varying ◽  
Content Type ◽  
Real Estate Markets ◽  
New Information ◽  
Information Set

Purpose – This paper aims to examine the risk premium for investors in a changing information environment in the Taiwan, New York and London real estate markets from March 2006 to November 2014. This study attempts to quantify behavioral expectations regarding (or motivation for) investment in the Taiwanese real estate in a changing information environment. Design/methodology/approach – This paper uses the rolling generalised autoregressive conditionally heteroskedastic in mean (GARCH-M) methodology which fixes the problem of conventional GARCH-M methodology. Findings – Empirical evidence suggests that the time-varying risk premium changed for the Taiwan real estate market with a new information set. The risk premium changed from 1.305 per cent per month to −7.232 per cent per month. The study also found persistent volatility shocks from March 2006 to November 2014. No such evidence was found for the New York and London real estate markets. Overall, this study finds evidence of a time-varying risk premium, partly explainable by governmental policies and partly unexplainable. Research limitations/implications – The use of the index of Standard and Poor’s Taiwan Real Estate Investment Trusts to study the Taiwan real estate industry may have aggregation effects in result. Practical implications – The present study will provide guidance to investors as well as policymakers regarding the Taiwan real estate market. Originality/value – This study uses the rolling GARCH-M model, which is a first for the Taiwan real estate market.

Evolution of REITs in the Nigerian real estate market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Daniel Ibrahim Dabara
Keyword(s):  
Real Estate ◽  
Investment Decisions ◽  
Real Estate Market ◽  
Individual Investors ◽  
Government Bonds ◽  
Content Type ◽  
Holding Period ◽  
Sharpe Ratios ◽  
Market Capitalisation ◽  
Property Markets

PurposeThis study aims to examine the performance of real estate investment trusts (REITs) in emerging property markets. The paper used the Nigerian REIT (N-REIT) as a case study of an African REIT market, to provide information for investment decisions.Design/methodology/approachSeven years quarterly returns data (from 2013 to 2019) were obtained and used to analyse the holding period returns, return–risk ratio, coefficient of variation and Sharpe ratios of N-REIT, All Share Index of stocks (ASI) and the Federal Government Bonds (FGB) in Nigeria.FindingsThe study reveals that N-REIT outperformed stocks but underperformed bonds. Concerning risk, stocks provided the highest level of risk (7.69), followed by bonds (2.78), while N-REIT provided the lowest risk (2.7). The Sharpe ratios showed that N-REIT is the second-best performing asset, while bond is the first and stocks the last on the risk-adjusted basis.Practical implicationsN-REIT is the second-largest REIT market in Africa with a market capitalisation of about US$136m. The N-REIT market has provided investment benefits to institutional and individual investors such as liquidity, transparency and ease of transaction. This study shows the peculiarity of N-REITs; this can guide investors in making informed investment decisions.Originality/valueThis study is one of the first to empirically analyse in a comparative context, the risk-adjusted performance of N-REITs, ASI and FGB. The study will add to the limited research in this field and equip investors with valuable information for informed investment decisions.

Non-mortgage loans in the Chinese residential real estate market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kerry Liu
Keyword(s):  
Real Estate ◽  
Real Estate Market ◽  
Cointegration Analysis ◽  
Residential Real Estate ◽  
Mortgage Loans ◽  
Data Set ◽  
Monthly Data ◽  
Content Type ◽  
Real Estate Prices

Purpose From January 2021, the potential flow of Chinese household non-mortgage loans, including business loans and short-term consumption loans to the residential real estate market, has attracted the attention of the regulatory authorities. This study aims to examine the effects of household non-mortgage loans on the Chinese residential real estate market. Design/methodology/approach Based on a monthly data set between July 2011 and December 2019, this study adopts a cointegration analysis. Findings This study finds that household non-mortgage loans do play a significant role in driving residential real estate prices in China. Originality/value While many studies have examined the Chinese real estate market and its linkage with the financial system and the economy, this study is the first of its kind in the academic literature that exclusively focusses on the role of non-mortgage loans in real estate prices, and makes an original contribution.

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