Timing and the holding periods of institutional real estate

Literature on investors' holding periods for securities suggests that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with shorter holding periods. In real estate, high transaction costs and illiquidity imply longer holding periods. Research on depreciation and obsolescence suggests that there might be an optimal holding period. Sales rates and holding periods for U.K. institutional real estate are analyzed, using a proportional hazards model, over an 18-year period. The results show longer holding periods than those claimed by investors, with marked differences by type of property and over time. The results shed light on investor behavior.

Holding periods and investment performance: analysing UK office returns 1983-2003

Drawing on a unique database of office properties constructed for Gerald Eve by IPD, this paper examines the holding periods of individual office properties sold between 1983 and 2003. It quantifies the holding periods of sold properties and examines the relationship between the holding period and investment performance. Across the range of holding periods, excess returns (performance relative to the market) are evenly distributed. There are as many winners as there are losers. The distribution of excess returns over different holding periods is widely spread with the risk of under-performance greater over short holding periods. Over the longer term, excess performance is confined to a narrow range and individual returns are more likely to perform in line with the market as a whole.

Explaining deviations from NAV in UK property companies: rationality and sentimentality

One of the most vexing issues for analysts and managers of property companies across Europe has been the existence and persistence of deviations of Net Asset Values of property companies from their market capitalisation. The issue has clear links to similar discounts and premiums in closed-end funds. The closed end fund puzzle is regarded as an important unsolved problem in financial economics undermining theories of market efficiency and the Law of One Price. Consequently, it has generated a huge body of research. Although it can be tempting to focus on the particular inefficiencies of real estate markets in attempting to explain deviations from NAV, the closed end fund discount puzzle indicates that divergences between underlying asset values and market capitalisation are not a ‘pure’ real estate phenomenon. When examining potential explanations, two recurring factors stand out in the closed end fund literature as often undermining the economic rationale for a discount – the existence of premiums and cross-sectional and periodic fluctuations in the level of discount/premium. These need to be borne in mind when considering potential explanations for real estate markets. There are two approaches to investigating the discount to net asset value in closed-end funds: the ‘rational’ approach and the ‘noise trader’ or ‘sentiment’ approach. The ‘rational’ approach hypothesizes the discount to net asset value as being the result of company specific factors relating to such factors as management quality, tax liability and the type of stocks held by the fund. Despite the intuitive appeal of the ‘rational’ approach to closed-end fund discounts the studies have not successfully explained the variance in closed-end fund discounts or why the discount to net asset value in closed-end funds varies so much over time. The variation over time in the average sector discount is not only a feature of closed-end funds but also property companies. This paper analyses changes in the deviations from NAV for UK property companies between 2000 and 2003. The paper present a new way to study the phenomenon ‘cleaning’ the gearing effect by introducing a new way of calculating the discount itself. We call it “ungeared discount”. It is calculated by assuming that a firm issues new equity to repurchase outstanding debt without any variation on asset side. In this way discount does not depend on an accounting effect and the analysis should better explain the effect of other independent variables.