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Article
Publication date: 6 July 2015

Jaime Yong and Anh Khoi Pham

Investment in Australia’s property market, whether directly or indirectly through Australian real estate investment trusts (A-REITs), grew remarkably since the 1990s. The degree…

Abstract

Purpose

Investment in Australia’s property market, whether directly or indirectly through Australian real estate investment trusts (A-REITs), grew remarkably since the 1990s. The degree of segregation between the property market and other financial assets, such as shares and bonds, can influence the diversification benefits within multi-asset portfolios. This raises the question of whether direct and indirect property investments are substitutable. Establishing how information transmits between asset classes and impacts the predictability of returns is of interest to investors. The paper aims to discuss these issues.

Design/methodology/approach

The authors study the linkages between direct and indirect Australian property sectors from 1985 to 2013, with shares and bonds. This paper employs an Autoregressive Fractionally Integrated Moving Average (ARFIMA) process to de-smooth a valuation-based direct property index. The authors establish directional lead-lag relationships between markets using bi-variate Granger causality tests. Johansen cointegration tests are carried out to examine how direct and indirect property markets adjust to an equilibrium long-term relationship and short-term deviations from such a relationship with other asset classes.

Findings

The authors find the use of appraisal-based property data creates a smoothing bias which masks the extent of how information is transmitted between the indirect property sector, stock and bond markets, and influences returns. The authors demonstrate that an ARFIMA process accounting for a smoothing bias up to lags of four quarters can overcome the overstatement of the smoothing bias from traditional AR models, after individually appraised constituent properties are aggregated into an overall index. The results show that direct property adjusts to information transmitted from market-traded A-REITs and stocks.

Practical implications

The study shows direct property investments and A-REITs are substitutible in a multi-asset portfolio in the long and short term.

Originality/value

The authors apply an ARFIMA(p,d,q) model to de-smooth Australian property returns, as proposed by Bond and Hwang (2007). The authors expect the findings will contribute to the discussion on whether direct property and REITs are substitutes in a multi-asset portfolio.

Details

Journal of Property Investment & Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 3 May 2016

Todd Kuethe

The purpose of this paper is to explore the consequences of appraisal smoothing in the estimation of the risks and returns of farm real estate. It examines the degree to which the…

Abstract

Purpose

The purpose of this paper is to explore the consequences of appraisal smoothing in the estimation of the risks and returns of farm real estate. It examines the degree to which the risk and return characteristics of farm real estate are an artifact of the methods used to measure aggregate property values.

Design/methodology/approach

A multifactor asset pricing model is estimated using farm real estate returns in a manner consistent with prior research, as well as using farm real estate returns calculated using two synthetic unsmoothing procedures developed in the real estate finance literature.

Findings

The model suggests that unsmoothed farm real estate returns exhibit characteristics that differ from those suggested by prior research. The unsmoothed returns suggest a stronger correlation with economy wide investment risks.

Originality/value

This is the first study to evaluate the impacts of appraisal smoothing in a farm real estate context. It provides a simple framework for addressing many of the pricing anomalies associated with farmland.

Details

Agricultural Finance Review, vol. 76 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

Article
Publication date: 1 September 1995

Peter Byrne and Stephen Lee

Uses modern portfolio theory and a spreadsheet optimizer to make anex‐post examination of the strategic diversification effects ofincluding property in a multi‐asset portfolio…

2264

Abstract

Uses modern portfolio theory and a spreadsheet optimizer to make an ex‐post examination of the strategic diversification effects of including property in a multi‐asset portfolio, using UK appraisal‐based (smoothed) data and several derived desmoothed series. Includes an additional low‐risk asset (cash) to investigate whether property′s place in the portfolio is maintained. In particular, considers the significance of constraining assets to match typical institutional portfolio levels. Concludes that previously supposed benefits of including property are overstated. Property still has a place in an institutional portfolio, but the analyses should not be based simply on the use of appraisal or desmoothed data in a portfolio optimizer without applying appropriate constraints.

Details

Journal of Property Finance, vol. 6 no. 3
Type: Research Article
ISSN: 0958-868X

Keywords

Article
Publication date: 7 April 2015

Sherif Roubi

The purpose of this paper is to fill an existing gap in the field. A transaction-based hotel price index for Europe is constructed to provide a true measure for hotel real estate…

Abstract

Purpose

The purpose of this paper is to fill an existing gap in the field. A transaction-based hotel price index for Europe is constructed to provide a true measure for hotel real estate performance. The index will enable investors enhance investment decisions in many ways: to assess individual property performance; to make an objective decision about where to invest and in which property type; to assess the relative performance of hotel assets to all other sectors and consequently reach optimal funds allocation decisions. This will allow investors to time their acquisitions/disposals according to the hotel property cycle.

Design/methodology/approach

Data include 495 hotel property transactions in Europe during the period between 2004 and 2013. Transaction prices and property characteristics were collected from a variety sources published by hotel agents and consultants, property magazines, newspapers, tourist board, individual property and hotel association registers and web sites. Data include property name, sale price, size, time of sale, location, buyers and sellers. A hedonic pricing model is developed where the transaction price is regressed on the different characteristics. The index is calculated by taking the anti-logs of regression coefficients of the year index.

Findings

This paper claims that the hotel property price index (HPPI) portrays a more realistic picture of what happened to hotel property prices in 2008 showing a single digit negative growth vs the hotel valuation index which reports a double digit negative growth rate in European hotel prices during the same year. The real impact of recession showed on hotel property prices in 2009. HPPI shows a crash in hotel property prices by -23.7 per cent in 2009. The year 2011 was marked by more sales transacted through administrators and a looming double-dip recession. Unlike appraisal-based indices, HPPI does not suffer from sticky valuation issues and is not desensitise from distressed properties. Therefore, it was more volatile to distressed situations throughout the period between 2011 and 2013.

Research limitations/implications

Results of this study should be considered with caution. There are limitations associated with transaction data including incompleteness or inaccuracies regarding price data, financing information for each deal, property tenure, and property characteristics.

Practical implications

This work has successfully developed an HPPI for hotel property in Europe. This paper paves the way for transaction-based indices that are more volatile than existing appraisal-based indices. This represents a significant development in tracking price movements of hotel properties in Europe. The index has potential to support research and forecasting of the hotel property cycles.

Originality/value

This paper fulfils an identified need to track hotel property prices and timing the hotel property cycle.

Details

Journal of Property Investment & Finance, vol. 33 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 11 April 2008

Eddie Chi Man Hui and Ka Hung Yu

This paper aims to find out whether lagging problems exist within Hong Kong's office values.

Abstract

Purpose

This paper aims to find out whether lagging problems exist within Hong Kong's office values.

Design/methodology/approach

A State Space Model with the Kalman filter is deployed in detecting the extent of lagging errors in Hong Kong's office price indices, proffered by the ratings and valuation department (RVD).

Findings

The findings suggest that about one year of lagging errors exists in RVD's office price indices compared with the stock market property indices. Also, the finding suggests that the Kalman filter provides a more efficient form of estimates for real estate values and returns.

Originality/value

While most studies investigating lagging problems of appraisal‐based returns concentrate on the US real estate market, studies in this regard for Asian countries (or cities) are few and far between. Hong Kong, in particular, is worth studying, considering its established role as a financial centre in South East Asia. This paper also provides some insights for further studies on the prediction of future real estate values, in particular those with fewer transactions.

Details

Property Management, vol. 26 no. 2
Type: Research Article
ISSN: 0263-7472

Keywords

Article
Publication date: 10 May 2011

Mihnea Constantinescu

The failure of the efficient market hypothesis has a direct bearing on the Geometric Brownian Motion model of asset returns. The current paper aims to investigate the effect that…

Abstract

Purpose

The failure of the efficient market hypothesis has a direct bearing on the Geometric Brownian Motion model of asset returns. The current paper aims to investigate the effect that the autocorrelation in the time‐series of returns has on the calculation of expected shortfall (ES) for an asset‐liability investor.

Design/methodology/approach

The regression model is selected according to the Akaike and the Schwarz information criterion. A series of tests are used to insure the stability of the autocorrelation parameters. Autocorrelation‐adjusted formulas for volatility and cross‐asset correlations are then employed for the computations.

Findings

The presence of autocorrelation changes the values of most of the correlation parameters used in the calculation of the ES of the risk bearing capital (RBC) – in some cases the cross‐asset correlation parameters double. Once the presence of smoothing is accounted for, the ES increases by 1 per cent in relative value.

Research limitations/implications

Other asset classes may also feature smoothed time‐series requiring thus an account of their autocorrelation structure and their interaction with the property asset. An analysis of the time stability of the cross‐asset correlations may also improve the estimation of the optimal RBC.

Originality/value

The proposed method focuses on the proper calculation of the RBC through the judicious estimation of the relevant risk measure for an investor who, while not having access to the underlying data pool from which the property index is computed, cannot adjust the index for the potential presence of temporal aggregation and market illiquidity.

Details

Journal of European Real Estate Research, vol. 4 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

Article
Publication date: 13 March 2007

Kim Hin (David) Ho

The paper aims to form system dynamics modeling in introduced in conjunction with econometric analysis and planned scenario analysis which will uniquely structure the process…

2037

Abstract

Purpose

The paper aims to form system dynamics modeling in introduced in conjunction with econometric analysis and planned scenario analysis which will uniquely structure the process whereby the ex ante capital values of the prime retail real estate sector.

Design/methodology/approach

The integrated system dynamics model investigates the structural factors affecting a unique expectation‐centered capital value (CV) formation of the prime retail real estate sector, through system dynamics modeling, econometric analysis , and the analysis of planned scenarios. This model extends beyond the usual lags and time line aspect of the price discovery process. The retail real estate sector is investigated within the Singapore context, as this sector changes dynamically and non‐linearly in relation to rental, cost and general demand expectations and to exogenous shocks like the Severe Advanced Respiratory Syndrome (SARS) outbreak. These macroeconomic factors are introduced to investigate their impact on retail space CVs through sensitivity analysis, during the simulation period of 20 quarters from the zero reference quarter (2Q2002).

Findings

The paper finds that simulation runs of the expectations‐centered system dynamics model are based on three scenarios. Sensitivity analysis is conducted for each scenario. Optimistic scenarios' CVs are lower than those of the likely scenario, owing to developers forming excessively high expectations that cannot be met by the actual rental levels. Pessimistic scenarios' CVs are highest. Based on bounded logic and the conditions for all scenarios, there are huge differences in expectations resulting in a large disparity in the endogenous CVs. Low actual rents are primarily due to poor informational efficiency, as the prime retail real estate sector is not transparent enough, and that many transactions are privately closed. Expectations cannot be met as the market information is not disseminated extensively through the agents and players. The scenarios clearly highlight the problem of informational non‐availability in the sector. The main policy implication is a need for a more transparent system of sharing rental and pricing information for the retail real estate sector, which is meaningful for real estate developers, investors and urban planners to sustain the retail real estate sector's viability.

Originality/value

This paper takes system dynamics modeling to the next level of incorporating econometric analysis, to estimate the sensitivity of retail rent to cost and the change in retail rent, for effectively structuring the dynamic process whereby the ex ante CVs of the prime retail sector in Singapore are formed and assessed, through a unique and rigorous expectations‐centered system dynamics model of rents, cost, retail stock, general demand and exogenous factors.

Details

Journal of Property Investment & Finance, vol. 25 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 1 March 2006

Stephen Lee and Simon Stevenson

This paper seeks to address the question of consistency, regarding the allocation of real estate in the mixed‐asset portfolio.

4547

Abstract

Purpose

This paper seeks to address the question of consistency, regarding the allocation of real estate in the mixed‐asset portfolio.

Design/methodology/approach

To address the question of consistency the allocation of real estate in the mixed‐asset portfolio was calculated over different holding periods varying from five to 25 years. For each portfolio and holding period, the percentage of portfolios with real estate was computed, as was the average real estate allocation in the optimum solution. Then, the risk and return differences between the two efficient frontiers, with and without real estate, were calculated to estimate real estate's marginal impact on portfolio performance.

Findings

First, the results suggest strongly that real estate has possessed the attribute of consistency in optimised portfolios. Second, the benefits from including real estate in the mixed‐asset portfolio tend to increase as the investment horizon is extended. Third, the position of real estate changes across the efficient frontier from its return enhancing ability to its risk‐reducing facility. Finally, the results show that the gain in return from adding real estate to the mixed‐asset portfolio is typically less compared with the reduction in portfolio risk.

Practical implications

The results highlight a number of issues in relation to the role of direct real estate within a mixed‐asset framework. In particular, the rationale behind the inclusion of real estate in the mixed‐asset portfolio depends on the length of the holding period of the investor and their position on the efficient frontier.

Originality/value

The study examines the attractiveness of direct real estate in the context of mixed‐asset portfolio.

Details

Journal of Property Investment & Finance, vol. 24 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 1 June 1996

Steven E. Moss and Howard C. Schneider

Tests for correlation between the NCREIF (NC) Index and EREIT Index. A multiple time series methodology is used to control for spurious correlation, allow for leading and lagging…

1041

Abstract

Tests for correlation between the NCREIF (NC) Index and EREIT Index. A multiple time series methodology is used to control for spurious correlation, allow for leading and lagging relationships, and to control for autoregressive moving average processes found in the time series. The underlying variables generating returns for the investor, current cash flow and capital appreciation, are analysed separately. Significant correlation is found between the NC cash flows and EREIT dividends. Significant correlation is not observed between the NC portfolio and EREIT when capital values are analysed. Suggests that one or both series are not a good measure of real estate returns.

Details

Journal of Property Finance, vol. 7 no. 2
Type: Research Article
ISSN: 0958-868X

Keywords

Article
Publication date: 1 April 1993

Kenneth M. Lusht

Addresses how real estate has performed as an investment, theefficiency of real estate markets, valuation issues, the pricing ofcontract contingencies, prices and price setting…

Abstract

Addresses how real estate has performed as an investment, the efficiency of real estate markets, valuation issues, the pricing of contract contingencies, prices and price setting and the agency business. Concludes that the list of research questions is growing and there is a high level of both public and private sector interest in the answers that can be provided.

Details

Journal of Property Valuation and Investment, vol. 11 no. 4
Type: Research Article
ISSN: 0960-2712

Keywords

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