Forecasting real estate returns using financial spreads

This paper examines the predictability of real estate asset returns using a number of time series techniques. A vector autoregressive model, which incorporates financial spreads, is able to improve upon the out of sample forecasting performance of univariate time series models at a short forecasting horizon. However, as the forecasting horizon increases, the explanatory power of such models is reduced, so that returns on real estate assets are best forecast using the long term mean of the series. In the case of indirect property returns, such short-term forecasts can be turned into a trading rule that can generate excess returns over a buy-and-hold strategy gross of transactions costs, although none of the trading rules developed could cover the associated transactions costs. It is therefore concluded that such forecastability is entirely consistent with stock market efficiency.

Linkages between property asset returns and interest rates: evidence for the UK

This paper considers the effect of short- and long-term interest rates, and interest rate spreads upon real estate index returns in the UK. Using Johansen's vector autoregressive framework, it is found that the real estate index cointegrates with the term spread, but not with the short or long rates themselves. Granger causality tests indicate that movements in short term interest rates and the spread cause movements in the returns series. However, decomposition of the forecast error variances from VAR models indicate that changes in these variables can only explain a small proportion of the overall variability of the returns, and that the effect has fully worked through after two months. The results suggest that these financial variables could potentially be used as leading indicators for real estate markets, with corresponding implications for return predictability.

The cyclical relations between traded property stock prices and aggregate time-series

This paper examines the cyclical regularities of macroeconomic, financial and property market aggregates in relation to the property stock price cycle in the UK. The Hodrick Prescott filter is employed to fit a long-term trend to the raw data, and to derive the short-term cycles of each series. It is found that the cycles of consumer expenditure, total consumption per capita, the dividend yield and the long-term bond yield are moderately correlated, and mainly coincident, with the property price cycle. There is also evidence that the nominal and real Treasury Bill rates and the interest rate spread lead this cycle by one or two quarters, and therefore that these series can be considered leading indicators of property stock prices. This study recommends that macroeconomic and financial variables can provide useful information to explain and potentially to forecast movements of property-backed stock returns in the UK.

Does orthogonalization really purge equity based property valuations of their general stock market influences?

This paper uses a recently developed nonlinear Granger causality test to determine whether linear orthogonalization really does remove general stock market influences on real estate returns to leave pure industry effects in the latter. The results suggest that there is no nonlinear relationship between the US equity-based property index returns and returns on a general stock market index, although there is evidence of nonlinear causality for the corresponding UK series.

The impact of economic and financial factors on UK property performance

This paper employs a vector autoregressive model to investigate the impact of macroeconomic and financial variables on a UK real estate return series. The results indicate that unexpected inflation, and the interest rate term spread have explanatory powers for the property market. However, the most significant influence on the real estate series are the lagged values of the real estate series themselves. We conclude that identifying the factors that have determined UK property returns over the past twelve years remains a difficult task.

Threshold autoregressive and Markov switching models: an application to commercial real estate

Although financial theory rests heavily upon the assumption that asset returns are normally distributed, value indices of commercial real estate display significant departures from normality. In this paper, we apply and compare the properties of two recently proposed regime switching models for value indices of commercial real estate in the US and the UK, both of which relax the assumption that observations are drawn from a single distribution with constant mean and variance. Statistical tests of the models' specification indicate that the Markov switching model is better able to capture the non-stationary features of the data than the threshold autoregressive model, although both represent superior descriptions of the data than the models that allow for only one state. Our results have several implications for theoretical models and empirical research in finance.

What Tenants Want: UK occupiers’ requirements when renting commercial property and strategic implications for landlords

Businesses need property in order to generate turnover and profits. If real estate owners are to be able to provide properties and related services that are desirable, it is crucial that they understand tenants’ requirements and preferences. Changes in the way businesses operate might well lead to an overall reduction in space requirements in all sectors. Faced with reductions in demand, landlords will find themselves in an increasingly competitive marketplace for tenants. Of the array of strategies available to landlords, what strategies should they employ for maximum effect? This paper examines what United Kingdom tenants want from commercial property (retail, industrial and office). The first part provides an analysis of data from several hundred interviews with occupiers of commercial properties owned by some of the largest UK real estate investment companies. Results are presented for each of the asset classes separately. The second part compares the findings with previous research and discusses the strategic implications for landlords.

Treating the Tenant as a Customer: can good service improve real estate performance?

Customer Relationship Management (CRM) theory suggests that good customer service results in satisfied customers, who in turn are more likely to remain loyal and recommend the service provider to others. Applied to real estate, this theory implies that landlords should see a return on any investment in the service they give to tenants, in the form of increased lease renewal rates and fewer void periods, achieved without compromising rents. This paper examines determinants of occupier satisfaction, and investigates the relationship between occupier satisfaction and property performance, using measures such as capital growth, income return, lease renewal rates and total return. The analysis is based upon a pilot study using occupier satisfaction responses from around 2500 interviewees based in multi-tenanted offices, shopping centres and retail warehouses on out-of-town retail parks in the UK. The analysis is being extended to cover a larger sample for the author’s PhD. Part 1 of the analysis examines occupier satisfaction, whilst Part 2 considers its impact on property performance.

Measuring European property investment performance: comparing different approaches

Purpose – Price indices for commercial real estate markets are difficult to construct because assets are heterogeneous, they are spatially dispersed and they are infrequently traded. Appraisal-based indices are one response to these problems, but may understate volatility or fail to capture turning points in a timely manner. This paper estimates “transaction linked indices” for major European markets to see whether these offer a different perspective on market performance. The paper aims to discuss these issues. Design/methodology/approach – The assessed value method is used to construct the indices. This has been recently applied to commercial real estate datasets in the USA and UK. The underlying data comprise appraisals and sale prices for assets monitored by Investment Property Databank (IPD). The indices are compared to appraisal-based series for the countries concerned for Q4 2001 to Q4 2012. Findings – Transaction linked indices show stronger growth and sharper declines over the course of the cycle, but they do not notably lead their appraisal-based counterparts. They are typically two to four times more volatile. Research limitations/implications – Only country-level indicators can be constructed in many cases owing to low trading volumes in the period studied, and this same issue prevented sample selection bias from being analysed in depth. Originality/value – Discussion of the utility of transaction-based price indicators is extended to European commercial real estate markets. The indicators offer alternative estimates of real estate market volatility that may be useful in asset allocation and risk modelling, including in a regulatory context.

Residential property loans and bank performance during property price booms: evidence from Europe

Understanding the performance of banks is of the utmost importance due to the impact the sector may have on economic growth and financial stability. Residential mortgage loans constitute a large proportion of the portfolio of many banks and are one of the key assets in the determination of their performance. Using a dynamic panel model, we analyse the impact of residential mortgage loans on bank profitability and risk, based on a sample of 555 banks in the European Union (EU-15), over the period from 1995 to 2008. We find that an increase in residential mortgage loans seems to improve bank’s performance in terms of both profitability and credit risk in good market, pre-financial crisis, conditions. These findings may aid in explaining why banks rush to lend to property during booms because of the positive effect it has on performance. The results also show that credit risk and profitability are lower during the upturn in the residential property cycle.

A comparative analysis of the accuracy and uncertainty in real estate and macroeconomic forecasts

We compare and contrast the accuracy and uncertainty in forecasts of rents with those for a variety of macroeconomic series. The results show that in general forecasters tend to be marginally more accurate in the case of macro-economic series than with rents. In common across all of the series, forecasts tend to be smoothed with forecasters under-estimating performance during economic booms, and vice-versa in recessions We find that property forecasts are affected by economic uncertainty, as measured by disagreement across the macro-forecasters. Increased uncertainty leads to increased dispersion in the rental forecasts and a reduction in forecast accuracy.

Rationality and momentum in real estate investment forecasts

This study examines the rationality and momentum in forecasts for rental, capital value and total returns for the real estate investment market in the United Kingdom. In order to investigate if forecasters are affected by the general economic conditions present at the time of forecast we incorporate into the analysis Gross Domestic Product(GDP) and the Default Spread (DS). The empirical findings show high levels of momentum in the forecasts, with highly persistent forecast errors. The results also indicate that forecasters are affected by adverse conditions. This is consistent with the finding that they tend to exhibit greater forecast error when the property market is underperforming and vice-versa.

Real estate and social inequality in Latin America: approaches in Argentina, Brazil, Chile and Colombia

Latin America is known as the most unequal region in the world, where extreme displays of wealth and exposure to scarcity lay bare in the urban landscape. Inequality is not just a social issue; it has considerable impact on economic development. This is because social inequality generates instability and conflict, which can create unsettling conditions for investment. At the macro level, social inequality can also present barriers to economic development, as most government policies and resources tend to be directed in solving social conflict rather than to promote and generate growth. This is one of the reasons usually cited in explaining the development gap between Latin America and other emerging economies, take East Asia for example - they have similar policies to those applied recently in Latin America, but are achieving better growth. The other reason cited is institutional; this includes governance as well as property rights and enforcement of contracts. The latter is the focus of this chapter.

The persistence of distance: a gravity model of European cross-border real estate development flows

Purpose – This paper aims to investigate the scale and drivers of cross-border real estate development in Western Europe and Central and Eastern Europe. Design/methodology/approach – Placing cross-border real estate development within the framework of foreign direct investment (FDI), conceptual complexities in characterizing the notional real estate developer are emphasized. Drawing upon a transaction database, this paper proxies cross-border real estate development flows with asset sales by developers. Findings – Much higher levels of market penetration by international real estate developers are found in the less mature markets of Central and Eastern Europe. Analysis suggests a complex range of determinants with physical distance remaining a consistent barrier to cross-border development flows. Originality/value – This analysis adds significant value in terms of understanding cross-border real estate development flows. In this study, a detailed examination of the issues based on a rigorous empirical analysis through gravity modelling is offered. The gravity framework is one of the most confirmed empirical regularities in international economics and commonly applied to trade, FDI, migration, foreign portfolio investment inter alia. This paper assesses the extent to which it provides useful insights into the pattern of cross-border real estate development flows.