Back from beyond bid-ask spread: estimating liquidity in international markets

Research on the topic of liquidity has greatly benefited from the improved availability of data. Researchers have addressed questions regarding the factors that influence bid-ask spreads and the relationship between spreads and risk, return and liquidity. Intra-day data have been used to measure the effective spread and researchers have been able to refine the concepts of liquidity to include the price impact of transactions on a trade-by-trade analysis. The growth in the creation of tax-transparent securities has greatly enhanced the visibility of securitized real estate, and has naturally led to the question of whether the increased visibility of real estate has caused market liquidity to change. Although the growth in the public market for securitized real estate has occurred in international markets, it has not been accompanied by universal publication of transaction data. Therefore this paper develops an aggregate daily data-based test for liquidity and applies the test to US data in order to check for consistency with the results of prior intra-day analysis. If the two approaches produce similar results, we can apply the same technique to markets in which less detailed data are available and offer conclusions on the liquidity of a wider set of markets.

Appraiser behaviour and appraisal smoothing: some qualitative and quantitative evidence

There is a substantial literature which suggests that appraisals are smoothed and lag the true level of prices. This study combines a qualitative interview survey of the leading fund manager/owners in the UK and their appraisers with a empirical study of the number of appraisals which change each month within the IPD Monthly Index. The paper concentrates on how the appraisal process operates for commercial property performance measurement purposes. The survey interviews suggest that periodic appraisal services are consolidating in fewer firms and, within these major firms, appraisers adopt different approaches to changing appraisals on a period by period basis, with some wanting hard transaction evidence while others act on "softer' signals. The survey also indicates a seasonal effect with greater effort and information being applied to annual and quarterly appraisals than monthly. The analysis of the appraisals within the Investment Property Databank Monthly Index confirms this effect with around 5% more appraisals being moved at each quarter day than the other months. January and August have significantly less appraisal changes than other months.

Flight to quality? An investigation of the attributes of sold properties in hot and cold markets

This paper uses sales transaction data in order to examine whether flight from risk phenomena took place in the US office property investment market during the financial crisis of 2007-2009. The effect of the crisis on the pricing of property quality attributes, mainly summarized by the class category of each building, is investigated. In addition, the paper examines how turnover levels were affected by the market downturn and whether there were significant variations between different real estate quality types. The results of the hedonic regression models suggest that the price spread between Class, A, B and C grew significantly during the downturn. We also find that property attributes such as size, height and age are priced significantly different in ‘hot’ and ‘cold’ markets.

Appraiser behaviour and appraisal smoothing: some qualitative and quantitative evidence

There is a substantial literature which suggests that appraisals are smoothed and lag the true level of prices. This study combines a qualitative interview survey of the leading fund manager/owners in the UK and their appraisers with a empirical study of the number of appraisals which change each month within the IPD Monthly Index. The paper concentrates on how the appraisal process operates for commercial real estate performance measurement purposes. The survey interviews suggest that periodic appraisal services are consolidating in fewer firms and, within these major firms, appraisers adopt different approaches to changing appraisals on a period by period basis, with some wanting hard transaction evidence while others act on ‘softer’ signals. The survey also indicates a seasonal effect with greater effort and information being applied to annual and quarterly appraisals than monthly. The analysis of the appraisals within the IPD Monthly Index confirms this effect with around 5% more appraisals being moved at each quarter day than the other months. More November appraisals change than expected and this suggests that the increased information flows for the December end year appraisals are flowing through into earlier appraisals, especially as client/appraiser draft appraisal meetings for the December appraisals, a regular occurrence in the UK, can occur in November. January illustrates significantly less activity than other months, a seasonal effect after the exertions of the December appraisals.

Permanent trading impacts and bond yields

We analyze four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms. In order to measure the informational content of trading activity, we estimate the permanent price response to trades. We find not only strong evidence of information asymmetry in sovereign bond markets, but we also show the relevance of information asymmetry in explaining the cross-sectional variations of bond yields across a wide range of bond maturities and countries. Our results confirm that trades of more recently issued bonds and longer maturity bonds have a greater permanent effect on prices. We compare the price impact of trades for bonds across different maturity categories and find that trades of French and German bonds have the highest long-term price impact in the short maturity class whereas trades of German bonds have the highest permanent price impacts in the long maturity class. More importantly, we study the cross-section of bond yields and find that after controlling for conventional factors, investors demand higher yields for bonds with larger permanent trading impact. Interestingly, when investors face increased market uncertainty, they require even higher compensation for information asymmetry.

Green noise or green value? Measuring the price effects of environmental certification in commercial buildings

This paper investigates the price effects of environmental certification on commercial real estate assets. It is argued that there are likely to be three main drivers of price differences between certified and non-certified buildings. First, certified buildings offer a bundle of benefits to occupiers relating to business productivity, image and occupancy costs. Second, due to these occupier benefits, certified buildings can result in higher rents and lower holding costs for investors. Third, certified buildings may require a lower risk premium. Drawing upon the CoStar database of US commercial real estate assets, hedonic regression analysis is used to measure the effect of certification on both rent and price. We first estimate the rental regression for a sample of 110 LEED and 433 Energy Star as well as several thousand benchmark buildings to compare the sample to. The results suggest that, compared to buildings in the same metropolitan region, certified buildings have a rental premium and that the more highly rated that buildings are in terms of their environmental impact, the greater the rental premium. Furthermore, based on a sample of transaction prices for 292 Energy Star and 30 LEED-certified buildings, we find price premia of 10% and 31% respectively compared to non-certified buildings in the same metropolitan area

Timing and the holding periods of institutional real estate

The literature on investors’ holding periods for equities and bonds suggest that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with short-term trading and hence shorter holding periods. High transaction costs and the perceived illiquidity of the real estate market leads to an expectation of longer holding periods. Further, work on depreciation and obsolescence might suggest that there is an optimal holding period. However, there is little empirical work in the area. In this paper, data from the Investment Property Databank are used to investigate sales rate and holding period for UK institutional real estate between 1981 and 1994. Sales rates are investigated using the Cox proportional hazards framework. The results show longer holding periods than those claimed by investors. There are marked differences by type of property and sales rates vary over time. Contemporaneous returns are positively associated with an increase in the rate of sale. The results shed light on investor behaviour.

An analysis of the determinants of cross-border real estate development flows

This paper investigates the scale and drivers of cross-border real estate development in western and central and eastern Europe (CEE). Drawing upon existing literature on the integration of international real estate markets, we make some inferences on expected patterns of cross-border real estate development from this literature review. The paper draws upon a transactions database in order to assess the penetration of national markets by international real estate developers. The determinants of cross-border transaction flows are modeled as a function the range of economic and real estate variables. Whilst western European markets tend to be dominated by local developers, much higher levels of market penetration by international real estate developers are found in the less mature markets of central and eastern Europe. Empirical modelling based on gravity model specifications reveal the importance of size of the economies, distance between countries, extent of globalization and EU membership as significant determinants of cross-border real estate development flow.

The distribution of London residential property prices and the role of spatial lock-in

Much of mainstream economic analysis assumes that markets adjust smoothly, through prices, to changes in economic conditions. However, this is not necessarily the case for local housing markets, whose spatial structures may exhibit persistence, so that conditions may not be those most suited to the requirements of modern-day living. Persistence can arise from the existence of transaction costs. The paper tests the proposition that housing markets in Inner London exhibit a degree of path dependence, through the construction of a three-equation model, and examines the impact of variables constructed for the 19th and early 20th centuries on modern house prices. These include 19th-century social structures, slum clearance programmes and the 1908 underground network. Each is found to be significant. The tests require the construction of novel historical datasets, which are also described in the paper.

The (de)merits of minimum-variance hedging: application to the crack spread

We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, considerable care is required when processing the relevant data and accounting for the costs of maintaining and re-balancing the hedge position. We find that the variance reduction produced by all models is statistically and economically indistinguishable from the one-for-one “naïve” hedge. However, minimum-variance hedging models, especially those based on GARCH, generate much greater margin and transaction costs than the naïve hedge. Therefore we encourage hedgers to use a naïve hedging strategy on the crack spread bundles now offered by the exchange; this strategy is the cheapest and easiest to implement. Our conclusion contradicts the majority of the existing literature, which favours the implementation of GARCH-based hedging strategies.

Lessons from the private finance initiative in the UK: benefits, problems and critical success factors

Purpose – This paper summarises the main research findings from a detailed, qualitative set of structured interviews and case studies of private finance initiative (PFI) schemes in the UK, which involve the construction of built facilities. The research, which was funded by the Foundation for the Built Environment, examines the emergence of PFI in the UK. Benefits and problems in the PFI process are investigated. Best practice, the key critical factors for success, and lessons for the future are also analysed. Design/methodology/approach – The research is based around 11 semi-structured interviews conducted with stakeholders in key PFI projects in the UK. Findings – The research demonstrates that value for money and risk transfer are key success criteria. High procurement and transaction costs are a feature of PFI projects, and the large-scale nature of PFI projects frequently acts as barrier to entry. Research limitations/implications – The research is based on a limited number of in-depth case study interviews. The paper also shows that further research is needed to find better ways to measure these concepts empirically. Practical implications – The paper is important in highlighting four main areas of practical improvement in the PFI process: value for money assessment; establishing end-user needs; developing competitive markets and developing appropriate skills in the public sector. Originality/value – The paper examines the drivers, barriers and critical success factors for PFI in the UK for the first time in detail and will be of value to property investors, financiers, and others involved in the PFI process.

Is Energy Efficiency Priced in the Housing Market? Some Evidence from the United Kingdom.

This paper investigates whether energy performance ratings, as measured by mandatory Energy Performance Certificates (EPCs), are reflected in the sale prices of residential properties. This is the first large-scale empirical study of this topic in the UK involving approximately 400,000 dwellings in the period from 1995 to 2011. Applying hedonic regression and an augmented repeat sales regression, we find a positive relationship between the energy efficiency rating of a dwelling and the transaction price per square metre. The price effects of superior energy performance tend to be higher for terraced dwellings and flats compared to detached and semi-detached dwellings. The evidence is less clear-cut for house price growth rates but remains supportive of an overall positive association. Overall, the results of this study appear to support the hypothesis that energy efficiency levels are reflected in UK house prices, at least in recent years.

TRCM: a methodology for temporal analysis of evolving concepts in Twitter

The Twitter network has been labelled the most commonly used microblogging application around today. With about 500 million estimated registered users as of June, 2012, Twitter has become a credible medium of sentiment/opinion expression. It is also a notable medium for information dissemination; including breaking news on diverse issues since it was launched in 2007. Many organisations, individuals and even government bodies follow activities on the network in order to obtain knowledge on how their audience reacts to tweets that affect them. We can use postings on Twitter (known as tweets) to analyse patterns associated with events by detecting the dynamics of the tweets. A common way of labelling a tweet is by including a number of hashtags that describe its contents. Association Rule Mining can find the likelihood of co-occurrence of hashtags. In this paper, we propose the use of temporal Association Rule Mining to detect rule dynamics, and consequently dynamics of tweets. We coined our methodology Transaction-based Rule Change Mining (TRCM). A number of patterns are identifiable in these rule dynamics including, new rules, emerging rules, unexpected rules and ?dead' rules. Also the linkage between the different types of rule dynamics is investigated experimentally in this paper.

Earl of Aylesford v Morris (1873)

A Characteristic of a landmark case is that it stands for a proposition of law. In Earl of Aylesford v Morris,1 Lord Selborne held that where there existed an inequality between contracting parties, with weakness on one side and an extortionate advantage taken of that weakness on the other, the contract could not stand unless the party claiming the benefit of the contract could rebut the presumption by establishing that the transaction was ‘fair, just and reasonable’. This chapter examines the historical circumstances behind the formulation of this proposition.