Real estate investment in global financial centers: risk, return and contagion

Global financial activity is heavily concentrated in a small number of world cities –international financial centers. The office markets in those cities receive significant flows of investment capital. The growing specialization of activity in IFCs and innovations in real estate investment vehicles lock developer, occupier, investment, and finance markets together, creating common patterns of movement and transmitting shocks from one office market throughout the system. International real estate investment strategies that fail to recognize this common source of volatility and risk may fail to deliver the diversification benefits sought.

Corporate social performance and stock returns: UK evidence from disaggregate measures

This study examines the relation between corporate social performance and stock returns in the UK. We closely evaluate the interactions between social and financial performance with a set of disaggregated social performance indicators for environment, employment, and community activities instead of using an aggregate measure. While scores on a composite social performance indicator are negatively related to stock returns, we find the poor financial reward offered by such firms is attributable to their good social performance on the environment and, to a lesser extent, the community aspects. Considerable abnormal returns are available from holding a portfolio of the socially least desirable stocks. These relationships between social and financial performance can be rationalized by multi-factor models for explaining the cross-sectional variation in returns, but not by industry effects.

Depreciation and its impact on the total return of UK commercial real estate, 1994-2003

Depreciation is a key element of understanding the returns from and price of commercial real estate. Understanding its impact is important for asset allocation models and asset management decisions. It is a key input into well-constructed pricing models and its impact on indices of commercial real estate prices needs to be recognised. There have been a number of previous studies of the impact of depreciation on real estate, particularly in the UK. Law (2004) analysed all of these studies and found that the seemingly consistent results were an illusion as they all used a variety of measurement methods and data. In addition, none of these studies examined impact on total returns; they examined either rental value depreciation alone or rental and capital value depreciation. This study seeks to rectify this omission, adopting the best practice measurement framework set out by Law (2004). Using individual property data from the UK Investment Property Databank for the 10-year period between 1994 and 2003, rental and capital depreciation, capital expenditure rates, and total return series for the data sample and for a benchmark are calculated for 10 market segments. The results are complicated by the period of analysis which started in the aftermath of the major UK real estate recession of the early 1990s, but they give important insights into the impact of depreciation in different segments of the UK real estate investment market.

The underlying return generating factors for REIT returns: an application of independent component analysis

Multi-factor approaches to analysis of real estate returns have, since the pioneering work of Chan, Hendershott and Sanders (1990), emphasised a macro-variables approach in preference to the latent factor approach that formed the original basis of the arbitrage pricing theory. With increasing use of high frequency data and trading strategies and with a growing emphasis on the risks of extreme events, the macro-variable procedure has some deficiencies. This paper explores a third way, with the use of an alternative to the standard principal components approach – independent components analysis (ICA). ICA seeks higher moment independence and maximises in relation to a chosen risk parameter. We apply an ICA based on kurtosis maximisation to weekly US REIT data using a kurtosis maximising algorithm. The results show that ICA is successful in capturing the kurtosis characteristics of REIT returns, offering possibilities for the development of risk management strategies that are sensitive to extreme events and tail distributions.

Non-normal real estate return distributions by property type in the UK

Investment risk models with infinite variance provide a better description of distributions of individual property returns in the IPD UK database over the period 1981 to 2003 than normally distributed risk models. This finding mirrors results in the US and Australia using identical methodology. Real estate investment risk is heteroskedastic, but the characteristic exponent of the investment risk function is constant across time – yet it may vary by property type. Asset diversification is far less effective at reducing the impact of non‐systematic investment risk on real estate portfolios than in the case of assets with normally distributed investment risk. The results, therefore, indicate that multi‐risk factor portfolio allocation models based on measures of investment codependence from finite‐variance statistics are ineffective in the real estate context

Individual assets, market structure and the drivers of return

Much prior research on the structure and performance of UK real estate portfolios has relied on aggregated measures for sector and region. For these groupings to have validity, the performance of individual properties within each group should be similar. This paper analyses a sample of 1,200 properties using multiple discriminant analysis and cluster analysis techniques. It is shown that conventional property type and spatial classifications do not capture the variation in return behaviour at the individual building level. The major feature is heterogeneity - but there may be distinctions between growth and income properties and between single and multi-let properties that could help refine portfolio structures.