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Article
Publication date: 5 March 2018

Florian Unbehaun and Franz Fuerst

This study aims to assess the impact of location on capitalization rates and risk premia.

Abstract

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.

Details

Studies in Economics and Finance, vol. 35 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 18 September 2018

Odilon Costa, Franz Fuerst and Wesley Mendes-da-Silva

While broader property-type categories of real estate markets have been scrutinized at microeconomic level in some segments – namely, residential, retail, industrial and…

Abstract

Purpose

While broader property-type categories of real estate markets have been scrutinized at microeconomic level in some segments – namely, residential, retail, industrial and hospitality, there is limited evidence showing that local office markets can be viewed as monolithic and economically integrated entities. The purpose of this paper is to investigate how occupiers differ in their willingness to pay for principal office rent determinants in the corporate and non-corporate sectors.

Design/methodology/approach

A sample of properties located in the largest office market in Latin America is partitioned based on the average size of leasable units. This approach captures interactions between different groups of investors and occupiers, and is commonly adopted by local market practitioners due to lack of detailed information on market participants. The pricing schedules for these two groups of buildings are then empirically compared through hedonic regression analysis and parameter stability tests.

Findings

The regressions show that corporate and smaller occupier properties form distinct spatial and non-spatial submarkets, but that their temporal patterns are quite similar. Thus, these property-type segments can be classified as imperfect substitutes with distinct pricing schemes, but not as a unique market, as their pricing schedules are not generalizable.

Practical implications

The results imply that “office properties” are too complex and disparate to be reliably examined with a simple aggregate approach as practiced in developed office market research since the 1980s. The fragmented reality of office properties has important implications for investment decisions and real estate valuation.

Originality/value

This paper shows that the corporate office market exhibits distinct characteristics and key determinants of office price and rent valuation differ significantly between the corporate and non-corporate segments. The corollary of these findings is that market studies that require reliable estimates of price drivers may be enriched by modeling these two segmented markets separately. It is also important to note that this distinction cuts across the established A/B/C office space quality classification.

Details

Journal of Property Investment & Finance, vol. 36 no. 4
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 16 November 2015

Hassan Adan and Franz Fuerst

Improving the energy efficiency of the existing residential building stock has been identified as a key policy aim in many countries. The purpose of this paper is to…

Abstract

Purpose

Improving the energy efficiency of the existing residential building stock has been identified as a key policy aim in many countries. The purpose of this paper is to review the extant literature on investment decisions in domestic energy efficiency and presents a model that is both grounded in microeconomic theory and empirically tractable.

Design/methodology/approach

This study develops a modified and extended version of an existing microeconomic model to embed the retrofit investment decision in a residential property market context, taking into account tenants’ willingness to pay and cost-reducing synergies. A simple empirical test of the link between energy efficiency measures and housing market dynamics is then conducted.

Findings

The empirical data analysis for England indicates that where house prices are low, energy efficiency measures tend to increase the value of a house more in relative terms compared to higher-priced regions. Second, where housing markets are tight, landlords and sellers will be successful even without investing in energy efficiency measures. Third, where wages and incomes are low, the potential gains from energy savings make up a larger proportion of those incomes compared to more affluent regions. This, in turn, acts as a further incentive for an energy retrofit. Finally, the UK government has been operating a subsidy scheme which allows all households below a certain income threshold to have certain energy efficiency measures carried out for free. In regions, where a larger proportion of households are eligible for these subsidies,the authors also expect a larger uptake.

Originality/value

While the financial metrics of retrofit measures are by now well understood, most of the existing studies tend to view these investments in isolation, not as part of a larger bundle of considerations by landlords and owners of how energy retrofits might influence a property’s rent, price and appreciation rate. In this paper, the authors argue that establishing this link is crucial for a better understanding of the retrofit investment decision.

Details

Smart and Sustainable Built Environment, vol. 4 no. 3
Type: Research Article
ISSN: 2046-6099

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Article
Publication date: 2 March 2012

Franz Fuerst and Anna‐Maija Grandy

Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. The purpose of this paper…

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1745

Abstract

Purpose

Expectations of future market conditions are acknowledged to be crucial for the development decision and hence for shaping the built environment. The purpose of this paper is to study the central London office market from 1987 to 2009 and test for evidence of rational, adaptive and naive expectations.

Design/methodology/approach

Two parallel approaches are applied to test for either rational or adaptive/naive expectations: vector auto‐regressive (VAR) approach with Granger causality tests and recursive OLS regression with one‐step forecasts.

Findings

Applying VAR models and a recursive OLS regression with one‐step forecasts, the authors do not find evidence of adaptive and naïve expectations of developers. Although the magnitude of the errors and the length of time lags between market signal and construction starts vary over time and development cycles, the results confirm that developer decisions are explained, to a large extent, by contemporaneous and historic conditions in both the City and the West End, but this is more likely to stem from the lengthy design, financing and planning permission processes rather than adaptive or naive expectations.

Research limitations/implications

More generally, the results of this study suggest that real estate cycles are largely generated endogenously rather than being the result of large demand shocks and/or irrational behaviour.

Practical implications

Developers may be able to generate excess profits by exploiting market inefficiencies but this may be hindered in practice by the long periods necessary for planning and construction of the asset.

Originality/value

This paper focuses the scholarly debate of real estate cycles on the role of expectations. It is also one of very few spatially disaggregate studies of the subject matter.

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Article
Publication date: 2 March 2015

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…

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.

Details

Studies in Economics and Finance, vol. 32 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 11 May 2010

Franz Fuerst and Patrick McAllister

The purpose of this paper is to investigate the relationships between supply and demand in 19 European office markets in the period 1991‐2006. It estimates the variations…

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2936

Abstract

Purpose

The purpose of this paper is to investigate the relationships between supply and demand in 19 European office markets in the period 1991‐2006. It estimates the variations in the price elasticity of supply across the different markets. The paper tests whether developers display evidence of myopic or rational expectations in their behaviour.

Design/methodology/approach

The paper draws upon a time series of rental, take‐up and new completions for 20 European office markets. A static measurement of price elasticity is calculated for each office market. To measure this expected supply response in the empirical analysis, the paper applies an impulse response analysis.

Findings

There is an evidence of positive and negative price elasticity. In a significant proportion of cities, supply increases following falls in rental levels. As a result, there is some evidence of myopic behaviour in a proportion of the markets examined, there is little evidence to support the hypothesis that real estate developers systematically display myopic expectations. The diversity in developer responses to price signals is surprising. It is concluded that idiosyncratic rather than systematic factors may dominate supply‐side responses to market signals.

Research limitations/implications

This paper is essentially exploratory and raises a number of questions for further investigation. There is scope to address the research questions using better data series, in particular, net absorption rates, construction starts, real rental growth rates and different geographical definitions. There is also scope to extend the research to examine the causal factors underlying differences in supply elasticity, for instance, the relative contribution of constraining variables such regulatory restrictions and limitations in physical capacity. It is also possible to model the supply adjustment process more dynamically in an error‐correction framework.

Practical implications

The findings would suggest that the complexity and diversity of economic, institutional and capital market influences affecting European commercial real estate markets seem to be far too numerous for any single model of market or developer behaviour to explain.

Originality/value

This is the first paper to examine supply elasticity across a broad range of European office markets.

Details

Journal of European Real Estate Research, vol. 3 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

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Article
Publication date: 2 August 2011

Franz Fuerst, Patrick McAllister, Jorn van de Wetering and Peter Wyatt

Given the centrality of data and information to the evaluation and operation of policies to reduce carbon emissions, the purpose of this paper is to investigate potential…

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3197

Abstract

Purpose

Given the centrality of data and information to the evaluation and operation of policies to reduce carbon emissions, the purpose of this paper is to investigate potential sources of data within in the UK on the commercial building stock in terms of its physical characteristics, financial performance, energy consumption and environmental performance. The research aimed to increase understanding of the potential sources of data on property attributes, financial performance and energy use or environmental performance, with a particular emphasis on evaluating their strengths and weaknesses in terms of scope, quality, availability and practicability.

Design/methodology/approach

This is an explorative, qualitative study that uses semi‐structured interviews conducted with 11 different data holding organisations.

Findings

Whilst public sector organisations have the potential to provide the data required for large samples, there are major barriers to obtaining and linking the different databases. Data on the three key data elements (prices, attributes and environmental performance) tend to be split between different governmental agencies. There are likely to be substantial problems (and costs) of linking the databases due, in particular, to definitional differences. There is a conflict between government's public good objective of increasing knowledge of the environmental performance of buildings and its objective of maximising revenues from the commercial exploitation of data. Since the private sector organisations that hold data are commercially motivated, the samples that they have gathered are largely client driven and, consequently, tend to be partial, particular, proprietary, private and product‐related.

Originality/value

Since pricing studies are central to evaluating the effectiveness of eco‐labelling in property markets, this paper improves one's understanding of the role of information and data barriers to improving the allocative efficiency of commercial property markets.

Details

Journal of Financial Management of Property and Construction, vol. 16 no. 2
Type: Research Article
ISSN: 1366-4387

Keywords

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Article
Publication date: 27 May 2014

Marcelo Cajias, Franz Fuerst and Sven Bienert

This paper aims to investigate the effect of corporate social responsibility (CSR) ratings on the ex ante cost of capital of more than 2,300 listed US companies in a panel…

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2211

Abstract

Purpose

This paper aims to investigate the effect of corporate social responsibility (CSR) ratings on the ex ante cost of capital of more than 2,300 listed US companies in a panel from 2003 to 2010. It examines whether financial markets value continuous investment in CSR activities through higher market capitalization and lower cost of capital.

Design/methodology/approach

The measure of the cost of capital reflects the perceived riskiness of individual companies expressed in the unobserved internal rate of return that investors expect to hold a risky asset. Based on descriptive portfolio estimations, panel and quantile regressions, the authors model the cost of equity capital as a function of CSR strengths and concerns obtained from the KLD-database and accounting controls.

Findings

The authors show that firms' CSR strategies differ significantly across industry sectors. Customer-orientated companies such as telecommunications and automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, the authors find a 10-bp positive effect for one standard deviation of firms' intensive allocation of resources in sustainable activities.

Research limitations/implications

Since the authors are interested in the effect environmental, social and governance activities have on the firm's perceived market valuation rate, the authors apply the Fama-French model because of its efficiency in explaining realized returns, rather than incorporating analyst's long-term growth forecasts into the proxy for the equity premium.

Practical implications

Managers of companies with low or intermediate CSR scores may consider the financial benefits of improving their social and environmental performance. A good starting point is usually to draw up a company-wide CSR agenda, possibly guided by a dedicated CSR task force, mapping out the potential costs and benefits of such measures. In addition, by improving their CSR ratings, a company may get access to additional resources, ranging from the growing ethical investment industry to employees for whom CSR performance matters when choosing an employer.

Originality/value

The authors expand the existing literature by considering firm's CSR level to be in relation to the overall CSR performance and decompose firm's CSR agenda into strengths and concerns rather than counting the number of activities a firm is involved in. The applied methodology allows a better understanding of firm's CSR agenda and its implication for capital markets and investors on both long and short investment terms.

Details

Studies in Economics and Finance, vol. 31 no. 2
Type: Research Article
ISSN: 1086-7376

Keywords

Content available
Article
Publication date: 4 May 2012

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135

Abstract

Details

Journal of European Real Estate Research, vol. 5 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

Content available
Article
Publication date: 2 August 2011

Akintola Akintoye and Jim Birnie

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366

Abstract

Details

Journal of Financial Management of Property and Construction, vol. 16 no. 2
Type: Research Article
ISSN: 1366-4387

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