Listed property trusts and downside systematic risk sensitivity

Purpose: This paper aims to identify and examine the determinants of downside systematic risk in Australian listed property trusts (LPTs).

Design/methodology/approach: Capital asset pricing model (CAPM) and lower partial moment-CAPM (LPM-CAPM) are employed to compute both systematic risk and downside systematic risk. The methodology of Patel and Olsen and Chaudhry et al. is adopted to examine the determinants of systematic risk and downside systematic risk.

Findings: The results confirm that systematic risk and downside systematic risk can be individually identified. There is little evidence to support the existence of linkages between systematic risk in Australian LPTs and financial/management structure determinants. On the other hand, downside systematic risk is directly related to the leverage/management structure of a LPT. The results are also robust after controlling for the LPTs' investment characteristics and varying target rates of return.

Practical implications: Investors and real estate analysts should conscious with the higher returns from high leverage and internally managed LPTs. Although there is no evidence that these higher returns are related to higher systematic risk, there could be the compensation for higher downside systematic risk.

Originality/value: This study provides invaluable insights into the management of real estate risk in Australian LPTs with implications for REITs in other countries. Unlike previous studies of systematic risk in REITs or LPTs, this is the first study to assess downside systematic risk and explore the determinants of downside systematic risk in LPTs.

Downside beta and the cross-sectional determinants of listed property trust returns

This study examines the importance of downside beta when seeking to explain variations in listed property trust (LPT) returns in Australia between 1993 and 2005. The results reveal that downside beta outperforms conventional beta and provides higher explanatory power to the cross-sectional LPT return variations. The results also indicate that investors only require a premium for downside risk. However, the explanatory power of downside beta has diminished once the co-kurtosis of LPTs is controlled. Interestingly, the results also reveal that by itself downside beta is unable to fully explain returns in line with strong evidence for momentum and book-to-market ratio. The findings provide additional insights for investors and real estate analysts into the pricing of LPTs.

Momentum profits in Australian listed property trusts

This paper examines the profitability of momentum trading strategies in Australian listed property trusts (LPTs). Monthly value-weighted momentum portfolios are formed using the monthly excess returns of LPTs for the period from 1990 to 2005. Overall the findings confirm that a momentum trading strategy in Australian LPTs is a profitable strategy. More specifically, momentum strategies are profitable after adjusting for variance and downside risk where the momentum returns substantially outperform the benchmark. An analysis using different study periods confirm the findings about momentum. The practical implication from this study is that investors can generate substantial abnormal returns by adopting a momentum trading strategy, particularly with a long strategy (i.e. winner portfolios).

The impact of business outsourcing on corporate real estate in India

Driven by Western companies' requirements for efficiency and effectiveness, a trend towards outsourcing of business activities to India and other low-cost countries commenced in the early 1990s and has continued to grow at a surprisingly fast pace. In a relatively short timeframe India has become a global hub for back-office services, although the effect on the urban cities is yet to be fully comprehended. As American and European companies continue to relocate their information technology services and other back office works to the subcontinent, there has been a considerable flow-on effect on Indian corporate real estate. This paper addresses two key questions. Firstly, the factors important for Western companies' outsourcing of organisational activities to India, and secondly, the effect of business outsourcing on corporate real estate locational requirements in India. A survey of corporate real estate representatives in India and the UK was conducted with the results providing an insight into the present state and possible future direction of outsourcing for India. This research presents a unique insight into the impacts of Western business outsourcing on corporate real estate in India, and presents findings that are useful to both organisations seeking to relocate business activities to India and for property market analysts looking to understand drivers behind this sustained demand for Indian corporate real estate.

Understanding cange in residential property markets: Mapping residency of employment data

The changing nature of residential housing markets is due to a large number of influences, although some have a larger effect than others do on house values. Whilst it is extremely difficult to completely disaggregate all influencing factors, it is possible to highlight areas that have a strong relationship with property – one of these is residency of employment. This research investigates these links between residential housing markets as measured by the level of house prices and residency of employment as measured by industry sector employment. It focuses on Local Government Areas in the State of Victoria, Australia and examines change over a ten year period between 1991 and 2001 using census and house price information. It is supported by data sourced from the Australian Bureau of Statistics and the Victorian Government’s Valuer General’s Office. The analysis also considers changes in these employment sectors from Australia’s overall perspective, as well as comparison with changes in Victoria’s overall residency of employment trends. It is assisted by a spatial representation of three 'shift-share' components and property values with the support of a geographical information system (GIS).

The valuation of fast-food outlets : analysis, methodology, and reliability

Fast-food outlets are a significant subsector of the hospitality and tourism property market in Australia, and have experienced significant growth and global change in the past 20 years. However, little attention has been given in professional and academic literature to the valuation methodology and analysis of these properties. This article proposes a working definition of a fast-food outlet, traces recent changes in the structure of the fast-food industry, investigates the major determinants of value with respect to asset value, and examines to what extent these have changed. In particular, it isolates the role of goodwill in assessing going-concern value.

The valuation of self-funded retirement villages in Australia

Changing demographics will see an increasing demand for self-funded sector retirement villages in Australia. As such, valuers can expect to be more involved in providing valuation advice in this sector, although the central issue remains that retirement villages are complex businesses. They have been described as management intensive operating businesses with a substantial real estate element. As a result the valuation process in this sector requires a different type of analysis, in comparison to the traditional real estate based investment.
This paper provides an analysis of recent trends in the demand for retirement villages and examine current practise with respect to valuation thereof. It emphasises the need for a greater awareness of the ‘business enterprise value’ component and provides a framework within which the components of value can be better understood. The purpose of the paper is to provide a foundation for a greater reliability with respect to valuation advice.

Downside systematic risk in Australian listed property trusts

Previous studies on systematic risk have demonstrated the link between financial and management structure determinants and systematic risk. However, systematic risk is estimated by assuming return is normally distributed. This assumption is generally rejected for real estate returns. Therefore, downside systematic risk appears as a more sensible risk measure in estimating market-related risk. This study contributes to this body of knowledge by examining the determinants of downside systematic risk in Australian Listed Property Trusts (LPTs) over 1993-2005. The results reveal that systematic risk and downside systematic risk are empirically distinguishable. More specifically, there is limited evidence on the connection between these financial and management structure determinants and systematic risk. However, downside systematic risk is sensitive to leverage and management structure.

An exploration of the relationship between size and risk in a downside risk framework applied to Malaysian property shares

The relationship between size and risk (systematic and unsystematic risk) has received considerable attention in recent literature. However, these studies employ variance as the risk measure, which the appropriateness for using this risk measure is always questioned by researchers and practitioners due to its underlying strict assumptions. Therefore, there is crucial to adopt an alternative risk measure for ascertaining the relationships. The aim of the study is to examine the relationships between size and systematic downside risk and unsystematic downside risk in line with the theoretical sound of this risk measure. The empirical evidences reveal that the size is strongly correlated with unsystematic downside risk. While, there is a weak inverse relationship between size and systematic downside risk.

The relationship between sustainability and the value of office buildings

There is an increasing body of evidence to suggest that the development of sustainability in office buildings and the acceptance of these buildings in the broader property market is increasing. However a gap still remains between the value of sustainability and the value of the building from an International Valuation Standards Committee (IVSC) definition of market value. Current literature is limited in the investigation of the impact of sustainable criteria on value component when undertaking a valuation of a commercial office building. Whilst substantial advances have been made in sustainable design and construction aspects, as well as reducing implementation costs and enhancing benefits associated with sustainability, there appears to be inherent barriers in adopting sustainability in the valuation process for the property industry.

This paper examines the limited previous research into the elements of sustainable criteria that impact upon property value, and in turn should be reflected in traditional valuation methods. The immaturity of the property market for sustainable building is such that current valuation methods do not appear to have significant evidential proof of increased property value through sales or lease evidence for sustainable buildings. Furthermore, this lack of market evidence makes it inherently difficult for valuers to assess the real market value of sustainable buildings through current valuation methodology. In other words, the level of risk associated with incorporating different levels of sustainability into office buildings appears difficult to measure using a market value perspective in today’s property market. Accordingly this paper examines current research that has been undertaken to identify particular sustainable criteria that potentially affects the value of a sustainable building. For example, previous research suggests that sustainable criteria impact upon the valuation equation through rental growth, depreciation, risk premium and cash flow. This paper also examines how other studies have viewed the impact of sustainable criteria and how they are weighted within the valuation equation. The discussion provides an insight into the rapidly evolving area of sustainability and office buildings with emphasis placed on the valuation process that seeks to assess a hypothetical purchaser’s perspective of this relationship.

Understanding residential house prices : examining the contribution of social area analysis

A complete understanding of residential housing markets, particularly in relation to variations in house prices both within and between suburbs, continues to present challenges to property researchers and forecasters. Factors affecting changes in housing demand are not yet completely understood, and accordingly market changes cannot always be confidently predicted. Most urban cities contain precincts that have high or low house values at the same time, regardless of characteristics such as distance to the city centre, location of transport or topography. Exactly why these variations in suburb values occur is often unclear, although local residents are able to easily identify differences between the status of each suburb, especially when one area is clearly perceived as superior to another. Consequently, houses in premium suburbs are sold for substantially more than houses in other areas, primarily due to this perceived higher demand. An understanding of reasons behind varying levels of buyer demand has always been difficult to fully encapsulate in housing studies, even though clear links have been observed between housing affordability and the type of inhabitant that would live in a particular area. This study confirms that traditional economic indicators can not always observe the degree of purchaser and vendor willingness in the residential property market, as per the International Valuation Standards Committee definition of market value, and substantial consideration must also be given to characteristics of individual buyers and sellers within the marketplace. No longer can the focus be narrowly focussed just on endogenous factors such as interest rates and inflation levels.
Accordingly, this research draws the disciplines of demography and housing research closer together and looks to social indicators for an insight into the level of house prices. To establish this link, a two-stage process is adopted where social area analysis initially identifies the characteristics of suburbs within an urban area. This information is then used to examine variations in suburb values, resulting in a clearer understanding of the relationship between demographic variables and house prices. This research analysed changes in the value of established residential house prices in Melbourne, Australia as well as the relationship with social structure. The added dimension of time highlighted change, with data drawn from 1996 and 2001. The results confirmed the existence of strong linkages between social constructs and established house prices. Whilst acknowledging that the overall level of house values is influenced by external economic and political factors, differences between suburb values can be explained by demographic variables. The results confirm that increased emphasis must be placed upon demography when seeking to understand variations in residential property values between urban areas.