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1 – 10 of over 8000In the light of past financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This has impacted on the pricing of property…
Abstract
Purpose
In the light of past financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This has impacted on the pricing of property assets, partly through market sentiment and particularly concerning risk. It also limits modelling accuracy model accuracy. The purpose of this paper is to create a new variable and model to enhance analysis of what drives real estate yields incorporating market sentiment to risk.
Design/methodology/approach
This paper specifically considers the modelling of property pricing within a volatile economic environment. The theoretical context begins by analysing the relationship between property yields and government bonds. The analytical context then moves on to specifically include a measurement of risk which stresses its role and importance in investment markets since the Global Financial Crisis. The model thus incorporates macroeconomic and real estate data, together with an international risk multiplier, which is calculated within the paper.
Findings
The paper finds the use of measurements of market sentiment and risk are more powerful tools for modelling yields than previous techniques alone.
Research limitations/implications
This is an initial paper outlining the creation of sentiment and risk measurements in the financial market and showing an example of its application to a commercial real estate market. The implication is that this could add a major new explanatory variable to modelling of yields.
Practical implications
The paper highlights the importance of risk in the pricing of commercial real estate, over and above normal variables. It highlights how this can help explain over and undershooting of yields within commercial real estate which would be of great importance in the investment world.
Originality/value
This paper attempts to explicitly measure market sentiment, pricing of risk and how this impacts real estate pricing.
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The financial and economic turmoil that resulted from the Global Financial Crisis (GFC), included a marked increase in the volatility in real estate markets. Property asset prices…
Abstract
Purpose
The financial and economic turmoil that resulted from the Global Financial Crisis (GFC), included a marked increase in the volatility in real estate markets. Property asset prices were impacted by the real economy and market sentiment, particularly concerning the determination of risk. In an economic downturn, the perception of investment risk becomes increasingly important relative to overall total returns, and thus impacts on yields and performance of assets. In a recovery phase, and particularly within an environment of historically low government bonds, risk and return compete for importance. The aim of this paper is to assess the interrelationships and impacts on pricing between real estate risk, yield modelling outcomes and market sentiment in selective European city office markets.
Design/methodology/approach
This paper specifically considers the modelling of commercial property pricing in relation to the appetite for risk in the financial markets. The paper expands on previous work by determining a specific measure of risk pricing in relationship to changing financial market sentiment. The methodology underpinning the research specifically examines the scope for using national and international risk pricing within specific real estate markets in Europe.
Findings
This paper addresses whether there is a difference between the impact of risk on the pricing of real estate in international versus regional cities in Europe. The analysis, therefore, determines which city centre office markets in Europe have been most impacted by globalisation including the magnitude on real estate prices and market volatility. The outcome of the paper provides important insights into how changes in risk preferences in the international capital markets have driven and continues to drive yield movements under different market conditions.
Research limitations/implications
The paper considers the driving forces which have led to the volatile movements of yields, emanating from the GFC.
Practical implications
This paper considers the property market effects on pricing of commercial real estate and the drivers in selected European cities.
Originality/value
The outcome of the paper provides important insights into how changes in risk preferences in the international capital markets have driven and continue to drive the yield movements in different real estate markets in Europe.
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Martin Hoesli and Richard Malle
The article analyzes the effects of the coronavirus disease 2019 (COVID-19) pandemic on commercial real estate prices, with a particular focus on European markets.
Abstract
Purpose
The article analyzes the effects of the coronavirus disease 2019 (COVID-19) pandemic on commercial real estate prices, with a particular focus on European markets.
Design/methodology/approach
The authors start by highlighting caveats to bear in mind when referring to direct real estate indices. The authors then analyze the behavior of commercial real estate prices during the pandemic, emphasizing differences across property types. For that purpose, the authors use data for both direct and listed real estate and further discuss changes in the main factors affecting commercial real estate pricing. The article then turns to discussing the likely trajectory of commercial real estate prices in the future.
Findings
The authors report that retail and hospitality properties and to a lesser extent office buildings have been affected the most by COVID-19, while the residential and industrial sectors have been less affected by the crisis. The authors maintain that the future trajectory of prices will vary across sectors and that the type and location of assets will become increasingly important in their valuation.
Originality/value
This paper provides for a better understanding of the behavior of commercial real estate prices during the COVID-19 pandemic.
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Sarah Louise Sayce, Jim Clayton, Steven Devaney and Jorn van de Wetering
The authors outline a framework that captures the channels through which physical climate risks could affect cash flows and pricing of income-producing real estate. This…
Abstract
Purpose
The authors outline a framework that captures the channels through which physical climate risks could affect cash flows and pricing of income-producing real estate. This facilitates detailed consideration of how the future performance of real estate investments could be affected by such risks.
Design/methodology/approach
This is a literature-based investigation that draws on work commissioned by UNEP-FI (Clayton et al., 2021a, b). It extends this work to consider in more detail the channels through which climate risks may impact property performance and the implications for the valuation community.
Findings
Recent empirical studies have identified more instances where pricing is reflecting both current and anticipated climate risks. Market valuations cannot properly incorporate climate risk without clear evidence that it is priced by market participants, but valuers can advise clients on the potential for future impacts.
Research limitations/implications
While inferences can be made from studies of residential real estate, more research on commercial real estate pricing and climate risk is required to assist valuers and their clients, as well as other stakeholders in the real estate market.
Practical implications
Differences between a Market Value and an Investment Value context are considered, and how valuers could and should account for climate risk in each setting is discussed with reference to existing professional standards and guidance.
Originality/value
The article synthesises a wide range of literature to produce a framework for the channels by which real estate values could be influenced by climate risk.
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The purpose of this paper is to provide new insights into asset liquidity in direct commercial real estate investment in the UK. Transaction data provided by four institutional…
Abstract
Purpose
The purpose of this paper is to provide new insights into asset liquidity in direct commercial real estate investment in the UK. Transaction data provided by four institutional investors of commercial real estate are used to test for changes in asset liquidity as manifest in recorded times from price agreement to deal completion. Median times to completion by stage of the transaction are presented alongside industry estimates.
Design/methodology/approach
Stages of the transaction process are modelled and median times per stage calculated to track changes in asset liquidity over, and between, the two periods of the study (2000‐2002 and 2005‐2008). Real times to completion are considered in conjunction with estimated times compiled through interviews with senior level investment professionals. This paper applies the Wilcoxon rank‐sum test to determine the significance of variation in median times across the two study periods.
Findings
This paper provides empirical evidence that liquidity increased from 2000 to 2008. Median times from price agreement to completion decreased significantly (p=0.015) from 2000‐2002 to 2005‐2008, indicating an increase in asset liquidity in step with an overall increase in transaction volume. Furthermore, senior investment actors were found to persistently over‐estimate transaction efficiency and underestimate liquidity risk when acquiring and disposing of commercial properties.
Research limitations/implications
This work offers new insights into the changing nature of asset liquidity over the last decade based on a limited number of transactions. Additional studies involving larger samples of transactions would provide still greater insight into commercial real estate liquidity dimensions.
Practical implications
The paper presents evidence of pro‐cyclicality; asset liquidity varies positively with overall transaction volumes, and investment actors were found to overestimate asset liquidity suggesting a persistent underestimation of liquidity risk.
Originality/value
This paper addresses a gap in the extant literature offering real time on market‐time to completion observations alongside investor estimates. Median times to completion have been modelled and presented, together with time estimates provided by industry experts. Also, for first time in real estate research, median times to completion are shown to shorten significantly in‐line with increasing transaction volumes.
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Martin Hoesli and Richard Malle
The article aims to analyze the behavior of commercial real estate prices in Europe, with a focus on the post-coronavirus disease 2019 (COVID-19) pandemic period. The authors use…
Abstract
Purpose
The article aims to analyze the behavior of commercial real estate prices in Europe, with a focus on the post-coronavirus disease 2019 (COVID-19) pandemic period. The authors use national and city-level data for the various commercial real estate sectors in ten countries, as well as listed real estate data, to assess any differences across property type and space.
Design/methodology/approach
The authors analyze the behavior of commercial real estate prices after the COVID-19 pandemic, emphasizing differences across property types. For that purpose, the authors use national and city-level direct real estate data for the ten largest countries in terms of market capitalization, as well as listed real estate data. The article then turns to discussing the likely trajectory of commercial real estate prices in the future.
Findings
The recent rise in interest rates and geopolitical instability have affected prices differently across sectors. Industrial properties benefited from the pandemic, although prices declined significantly in 2022. Residential properties continued their upward price trend and have been the best-performing property type during the last two decades. Retail real estate continued its downward price trajectory. Thus far, office markets do not appear to be significantly affected by structural changes in the sector. The data for listed real estate markets in Europe suggest that markets bottomed out in early 2023.
Originality/value
This paper provides for a better understanding of the behavior of commercial real estate prices in Europe since the COVID-19 pandemic. The authors assess whether the effects found during the COVID-19 crisis were temporary or long-lasting. Also, many economic and political uncertainties have emerged since the beginning of the Ukraine war in February 2022, and it is important to analyze the effects of such uncertainties on commercial real estate prices.
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Franz Fuerst, Patrick McAllister and Petros Sivitanides
The purpose of this paper is to investigate the effect of the crisis on the pricing of asset quality attributes. This paper uses sales transaction data to examine whether flight…
Abstract
Purpose
The purpose of this paper is to investigate the effect of the crisis on the pricing of asset quality attributes. This paper uses sales transaction data to examine whether flight from risk phenomena took place in the US office market during the financial crisis of 2007-2009.
Design/methodology/approach
Hedonic regression procedures are used to test the hypothesis that the spread between the pricing of low-quality and high-quality characteristics increased during the crisis period compared to the pre-crisis period.
Findings
The results of the hedonic regression models suggest that the price spread between Class A and other properties grew significantly during the downturn.
Research limitations/implications
Our results are consistent with the hypothesis of an increased price spread following a market downturn between Class A and non-Class A offices. The evidence suggests that the relationships between the returns on Class A and non-Class A assets changed during the period of market stress or crisis.
Practical implications
These findings have implications for real estate portfolio construction. If regime switches can be predicted and/or responded to rapidly, portfolios may be rebalanced. In crisis periods, portfolios might be reweighted towards Class A properties and in positive market periods, the reweighting would be towards non-Class A assets.
Social implications
The global financial crisis has demonstrated that real estate markets play a crucial role in modern economies and that negative developments in these markets have the potential to spillover and create contagion for the larger economy, thereby affecting jobs, incomes and ultimately people’s livelihoods.
Originality/value
This is one of the first studies that address the flight to quality phenomenon in commercial real estate markets during periods of financial crisis and market turmoil.
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Ka Shing Cheung and Joshua Lee
Real estate is an asset that is traded in highly segmented, illiquid and informationally inefficient local markets. A short sale in real estate is almost infeasible and therefore…
Abstract
Purpose
Real estate is an asset that is traded in highly segmented, illiquid and informationally inefficient local markets. A short sale in real estate is almost infeasible and therefore impedes informed rational arbitrageurs to trade against mispricing. Thus, real estate returns are prone to sentiment-driven behaviours. Will the impacts on asset returns be identical for different types of sentiment?
Design/methodology/approach
This study argues that not all sentiment effects are created equal. Using the bounds test of the autoregressive distributed lag (ARDL) models, this paper examines how occupier sentiment versus investor sentiment contributes to the short-run and long-run dynamics of commercial real estate returns in Australia.
Findings
The empirical evidence suggests that investor sentiment and occupier sentiment influence return asymmetrically after macroeconomic conditions are controlled for.
Practical implications
The sectoral analysis further reveals that sector-specific sentiment plays a significant role in explaining commercial real estate returns. Furthermore, notable improvement is found in producing more accurate prediction in returns, given that measures of occupier and investor sentiment are appropriately specified in the forecast.
Originality/value
This study is novel in the sense that it acknowledges the impacts of occupiers' and investors' sentiment may be fundamentally different. The unique innovation and contribution of this study to behavioural finance literature are based on a new dataset from the Royal Institute of Chartered Surveyors which includes a survey-based measure of investor sentiment and occupier sentiment.
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Marian Alexander Dietzel, Nicole Braun and Wolfgang Schäfers
The purpose of this paper is to examine internet search query data provided by “Google Trends”, with respect to its ability to serve as a sentiment indicator and improve commercial…
Abstract
Purpose
The purpose of this paper is to examine internet search query data provided by “Google Trends”, with respect to its ability to serve as a sentiment indicator and improve commercial real estate forecasting models for transactions and price indices.
Design/methodology/approach
This paper examines internet search query data provided by “Google Trends”, with respect to its ability to serve as a sentiment indicator and improve commercial real estate forecasting models for transactions and price indices.
Findings
The empirical results show that all models augmented with Google data, combining both macro and search data, significantly outperform baseline models which abandon internet search data. Models based on Google data alone, outperform the baseline models in all cases. The models achieve a reduction over the baseline models of the mean squared forecasting error for transactions and prices of up to 35 and 54 per cent, respectively.
Practical implications
The results suggest that Google data can serve as an early market indicator. The findings of this study suggest that the inclusion of Google search data in forecasting models can improve forecast accuracy significantly. This implies that commercial real estate forecasters should consider incorporating this free and timely data set into their market forecasts or when performing plausibility checks for future investment decisions.
Originality/value
This is the first paper applying Google search query data to the commercial real estate sector.
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