The purpose of this paper is to decompose and measure the microstructure of property investment returns for Tokyo’s residential property markets in as much detail as possible in comparison with office market.
Using enterprise value data for property investment trust companies composed of share prices available on capital markets, this study proposed a method of estimating property investment returns corresponding to changes in capital markets, and clarified the distortion in capitalization rate that are formed based on property appraisal prices.
The results for residential property showed that as building floor space increased, income and price increased while the discount rate decreased. In particular, a higher return could be obtained from office property than residential property by investing in larger-scale properties. Building age lowered asset price and income for both residential and office property, especially for residential property.
In Japan, investors believe that investment returns are high for properties close to the city centre, relatively new properties and those with large design or floor space. Therefore, this study first measured how asset prices, income and asset price–income ratios that comprise property investment returns change based on differences in these property characteristics. Second, the reliability/distortion of information that can be observed on the property investment market was measured. Furthermore, there was a significant divergence between discount rates and risk premiums formed by asset or space markets versus capital markets.
The differences of discount rate and risk premium formed by asset markets versus capital markets indicate that appraisal prices have biases. Thus, when it comes to property investment decisions, it is essential to make active use not just of property investment returns based on appraisal prices formed by asset markets but also information formed by capital markets.
A greater difference was generated in a shrinking market, suggesting that analysing property returns estimated on asset market information alone could lead to erroneous investment decisions.
This research is the first to use the enterprise value data from real estate investment trust companies composed of share prices available on capital markets for calculating discount rate and risk premium in property market.
In writing this paper, the author received many suggestions during discussions with attendees at an international conference held by the European Central Bank in 2012 and 2014, including Erwin Diewert, David Geltner, Mick Silver and Bert Balk. This study was financially supported by Nomura Foundation and JSPS KAKEN(S) #25220502. The author gratefully acknowledges the financial support of the Nomura Foundation and JSPS KAKEN(S) #25220502.
Shimizu, C. (2017), "Microstructure of asset prices, property income and discount rates in the Tokyo residential market", International Journal of Housing Markets and Analysis, Vol. 10 No. 4, pp. 552-571. https://doi.org/10.1108/IJHMA-12-2016-0082Download as .RIS
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