Low-frequency volatility of real estate securities in relation to macroeconomic risk

Real estate securities have a number of distinct characteristics that differentiate them from stocks generally. Key amongst them is that under-pinning the firms are both real as well as investment assets. The connections between the underlying macro-economy and listed real estate firms is therefore clearly demonstrated and of heightened importance. To consider the linkages with the underlying macro-economic fundamentals we extract the ‘low-frequency’ volatility component from aggregate volatility shocks in 11 international markets over the 1990-2014 period. This is achieved using Engle and Rangel’s (2008) Spline-Generalized Autoregressive Conditional Heteroskedasticity (Spline-GARCH) model. The estimated low-frequency volatility is then examined together with low-frequency macro data in a fixed-effect pooled regression framework. The analysis reveals that the low-frequency volatility of real estate securities has strong and positive association with most of the macroeconomic risk proxies examined. These include interest rates, inflation, GDP and foreign exchange rates.

Public real estate and the term structure of interest rates: a cross-country study

Using a variation of the Nelson-Siegel term structure model we examine the sensitivity of real estate securities in six key global markets to unexpected changes in the level, slop and curvature of the yield curve. Our results confirm the time-sensitive nature of the exposure and sensitivity to interest rates and highlight the importance of considering the entire term structure of interest rates. One issue that is of particular of interest is that despite the 2007-9 financial crisis the importance of unanticipated interest rate risk weakens post 2003. Although the analysis does examine a range of markets the empirical analysis is unable to provide definitive evidence as to whether REIT and property-company markets display heightened or reduced exposure.

Does foreign investment affect US office real estate prices?

his article examines the impact of foreign real estate investment on U.S. office market capitalization rates. The geographic unit of analysis is MSA and the time period is 2001–2013. Drawing upon a database of commercial real estate transactions, the authors model the determinants of market capitalization rates with a particular focus on the significance of the proportion of market transactions involving foreign investors. Employing several econometric techniques to analyze the data, the results suggest statistically significant effects of foreign investment across 38 U.S. metro areas. It is estimated that, all else equal, a 100 basis point increase in foreign share of total investment in a U.S. metropolitan office market causes about an 8 basis point decrease in the market cap rate.

Liquidity and the drivers of search, due diligence and transaction times for UK commercial real estate investments

Trading commercial real estate involves a process of exchange that is costly and which occurs over an extended and uncertain period of time. This has consequences for the performance and risk of real estate investments. Most research on transaction times has occurred for residential rather than commercial real estate. We study the time taken to transact commercial real estate assets in the UK using a sample of 578 transactions over the period 2004 to 2013. We measure average time to transact from a buyer and seller perspective, distinguishing the search and due diligence phases of the process, and we conduct econometric analysis to explain variation in due diligence times between assets. The median time for purchase of real estate from introduction to completion was 104 days and the median time for sale from marketing to completion was 135 days. There is considerable variation around these times and results suggest that some of this variation is related to market state, type and quality of asset, and type of participants involved in the transaction. Our findings shed light on the drivers of liquidity at an individual asset level and can inform models that quantify the impact of uncertain time on market on real estate investment risk.