Timing and the holding periods of institutional real estate

The literature on investors’ holding periods for equities and bonds suggest that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with short-term trading and hence shorter holding periods. High transaction costs and the perceived illiquidity of the real estate market leads to an expectation of longer holding periods. Further, work on depreciation and obsolescence might suggest that there is an optimal holding period. However, there is little empirical work in the area. In this paper, data from the Investment Property Databank are used to investigate sales rate and holding period for UK institutional real estate between 1981 and 1994. Sales rates are investigated using the Cox proportional hazards framework. The results show longer holding periods than those claimed by investors. There are marked differences by type of property and sales rates vary over time. Contemporaneous returns are positively associated with an increase in the rate of sale. The results shed light on investor behaviour.

Commercial real estate return distributions: a review of literature and empirical evidence

This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

Are property prices non-linear? An investigation of the behaviour of US REITs and UK property company shares

Linear models of market performance may be misspecified if the market is subdivided into distinct regimes exhibiting different behaviour. Price movements in the US Real Estate Investment Trusts and UK Property Companies Markets are explored using a Threshold Autoregressive (TAR) model with regimes defined by the real rate of interest. In both US and UK markets, distinctive behaviour emerges, with the TAR model offering better predictive power than a more conventional linear autoregressive model. The research points to the possibility of developing trading rules to exploit the systematically different behaviour across regimes.

Valuation and arbitrage

The use of discounted cash flow (DCF) methods in investment valuation and appraisal is argued by many academics as being rational and more rigorous than the traditional capitalisation model. However those advocates of DCF should be cautious in their claims for rationality. The various DCF models all rely upon an all-encompassing equated yield (IRR) within the calculation. This paper will argue that this is a simplification of the risk perception which the investor places on the income profile from property. In determining the long term capital value of a property an 'average' DCF method will produce the 'correct' price, however, the individual short term values of each cash-flow may differ significantly. In the UK property market today, where we are facing a period in which prices are not expected to rise generally at the same rate or with such persistence as hitherto, investors and tenants are increasingly concerned with the down side implications of rental growth and investors may indeed be interested in trading property over a shorter investment horizon than they had originally planned. The purpose of this paper is therefore to bring to the analysis a rigorous framework which can be used to analyse the constituent cash flows within the freehold valuation. We show that the arbitrage analysis lends itself to segregating the capital value of the cash flows in a way which is more appropriate for financial investors

Property company performance and real interest rates: a regime-switching approach

Linear models of property market performance may be misspecified if there exist distinct states where the market drivers behave in different ways. This paper examines the applicability of non-linear regime-based models. A Self Exciting Threshold Autoregressive (SETAR) model is applied to property company share data, using the real rate of interest to define regimes. Distinct regimes appear exhibiting markedly different market behaviour. The model both casts doubt on the specification of conventional linear models and offers the possibility of developing effective trading rules for real estate equities.

The information content of REIT credit rating actions and transparency

We examine the short-run and long-run price reaction of equity REIT shares following credit rating actions, testing the transparency of the REIT structure. Generally, the economic effect on the stock price is subdued for both upgrades and downgrades compared to prior literature examining the broader U.S. equity market. An examination of trading volume revealed a significant increase in trading in reaction to downgrade credit rating changes, with a more subdued response to upgrades. The findings support the notion that REITs are more publicly forthcoming about the expectation of positive news in comparison to negative news.

The credit relationship between Henry III and merchants of Douai and Ypres, 1247-70

This article looks at an important but neglected aspect of medieval sovereign debt, namely ‘accounts payable’ owed by the Crown to merchants and employees. It focuses on the unusually well-documented relationship between Henry III, King of England between 1216 and 1272, and Flemish merchants from the towns of Douai and Ypres, who provided cloth on credit to the royal wardrobe. From the surviving royal documents, we reconstruct the credit advanced to the royal wardrobe by the merchants of Ypres and Douai for each year between 1247 and 1270, together with the king's repayment history. The interactions between the king and the merchants are then analysed. The insights from this analysis are applied to the historical data to explain the trading decisions made by the merchants during this period, as well as why the strategies of the Yprois sometimes differed from those of the Douaissiens.

Assessing continental-scale risks for generalist and specialist pollinating bee species under climate change

Increased risks of extinction to populations of animals and plants under changing climate have now been demonstrated for many taxa. This study assesses the extinction risks to species within an important genus of pollinating bees (Colletes: Apidae) by estimating the expected changes in the area and isolation of suitable habitat under predicted climatic condition for 2050. Suitable habitat was defined on the basis of the presence of known forage plants as well as climatic suitability. To investigate whether ecological specialisation was linked to extinction risk we compared three species which were generalist pollen foragers on several plant families with three species which specialised on pollen from a single plant species. Both specialist and generalist species showed an increased risk of extinction with shifting climate, and this was particularly high for the most specialised species (Colletes anchusae and C. wolfi). The forage generalist C. impunctatus, which is associated with Boreo-Alpine environments, is potentially threatened through significant reduction in available climatic niche space. Including the distribution of the principal or sole pollen forage plant, when modelling the distribution of monolectic or narrowly oligolectic species, did not improve the predictive accuracy of our models as the plant species were considerably more widespread than the specialised bees associated with them.

The interaction of volatility, volume and skewness: empirical evidence from REITs

This paper considers how trading volume impacts upon the first three moments of REIT returns. Consistent with previous studies of the broader stock market, we find that volume is a significant factor with respect to both returns and volatility. We also find evidence supportive of the Hong & Stein’s (2003) Investor Heterogeneity Theory with respect to the finding that skewness in REIT index returns is significantly related to volume. Furthermore, we also report findings that show the influence of the variability of volume with skewness.

Credit and liquidity components of corporate CDS spreads

This paper investigates the role of credit and liquidity factors in explaining corporate CDS price changes during normal and crisis periods. We find that liquidity risk is more important than firm-specific credit risk regardless of market conditions. Moreover, in the period prior to the recent “Great Recession” credit risk plays no role in explaining CDS price changes. The dominance of liquidity effects casts serious doubts on the relevance of CDS price changes as an indicator of default risk dynamics. Our results show how multiple liquidity factors including firm specific and aggregate liquidity proxies as well as an asymmetric information measure are critical determinants of CDS price variations. In particular, the impact of informed traders on the CDS price increases when markets are characterised by higher uncertainty, which supports concerns of insider trading during the crisis.

Broker use and the cost of liquidity in commercial real estate investment

Purpose – Commercial real estate is a highly specific asset: heterogeneous, indivisible and with less information transparency than most other commonly held investment assets. These attributes encourage the use of intermediaries during asset acquisition and disposal. However, there are few attempts to explain the use of different brokerage models (with differing costs) in different markets. This study aims to address this gap. Design/methodology/approach – The study analyses 9,338 real estate transactions in London and New York City from 2001 to 2011. Data are provided by Real Capital Analytics and cover over $450 billion of investments in this period. Brokerage trends in the two cities are compared and probit regressions are used to test whether the decision to transact with broker representation varies with investor or asset characteristics. Findings – Results indicate greater use of brokerage in London, especially by purchasers. This persists when data are disaggregated by sector, time or investor type, pointing to the role of local market culture and institutions in shaping brokerage models and transaction costs. Within each city, the nature of the investors involved seems to be a more significant influence on broker use than the characteristics of the assets being traded. Originality/value – Brokerage costs are the single largest non-tax charge to an investor when trading commercial real estate, yet there is little research in this area. This study examines the role of brokers and provides empirical evidence on factors that influence the use and mode of brokerage in two major investment destinations.

Responding to the EU Emissions Trading Scheme: an empirical analysis of corporate carbon disclosure strategy

The purpose of this paper is to explore how companies that hold carbon trading accounts under European Union Emissions Trading Scheme (EU ETS) respond to the climate change by using disclosures on carbon emissions as a means to generate legitimacy compared to others. The study is based on disclosures made in annual reports and stand-alone sustainability reports of UK listed companies from 2001- 2012. The study uses content analysis to capture both the quality and volume of the carbon disclosures. The results show that there is a significant increase in both the quality and volume of the carbon disclosures after the launch of EU ETS. Companies with carbon trading accounts provide greater detailed disclosures as compared to the others without an account. We also find that company size is positively correlated with the disclosures while the association with the industry produces an inconclusive result.

The trading profitability of forecasts of the gilt–equity yield ratio

Research has highlighted the usefulness of the Gilt–Equity Yield Ratio (GEYR) as a predictor of UK stock returns. This paper extends recent studies by endogenising the threshold at which the GEYR switches from being low to being high or vice versa, thus improving the arbitrary nature of the determination of the threshold employed in the extant literature. It is observed that a decision rule for investing in equities or bonds, based on the forecasts from a regime switching model, yields higher average returns with lower variability than a static portfolio containing any combinations of equities and bonds. A closer inspection of the results reveals that the model has power to forecast when investors should steer clear of equities, although the trading profits generated are insufficient to outweigh the associated transaction costs.