Do responsible real estate companies outperform their peers?

This paper investigates the relationship between corporate social and environmental performance and financial performance for a sample of publicly traded US real estate companies. Using the MSCI ESG (formerly KLD) database on seven Environmental, Social & Governance dimensions in the 2003-2010 period, and weighting the dimensions according to prominence in the real estate sector, we model Tobin's Q and annual total return in a panel data framework. The results indicate a positive relationship between ESG rating and Tobin's Q but this effect is driven by ESG concerns rather than strengths. Consistently across all model specifications, overall ESG ratings are associated with lower returns. Negative scores appear to result in higher returns in the short run but positive scores have no significant impact on returns.

Can sentiment surveys pre-empt real estate market activities?

We evaluate a number of real estate sentiment indices to ascertain current and forward-looking information content that may be useful for forecasting the demand and supply activities. Our focus lies on sector-specific surveys targeting the players from the supply-side of both residential and non-residential real estate markets. Analyzing the dynamic relationships within a Vector Auto-Regression (VAR) framework, we test the efficacy of these indices by comparing them with other coincident indicators in predicting real estate returns. Overall, our analysis suggests that sentiment indicators convey important information which should be embedded in the modeling exercise to predict real estate market returns. Generally, sentiment indices show better information content than broad economic indicators. The goodness of fit of our models is higher for the residential market than for the non-residential real estate sector. The impulse responses, in general, conform to our theoretical expectations. Variance decompositions and out-of-sample predictions generally show desired contribution and reasonable improvement respectively, thus upholding our hypothesis. Quite remarkably, consistent with the theory, the predictability swings when we look through different phases of the cycle. This perhaps suggests that, e.g. during recessions, market players’ expectations may be more accurate predictor of the future performances, conceivably indicating a ‘negative’ information processing bias and thus conforming to the precautionary motive of consumer behaviour.

Analyzing the performance of non-listed real estate funds: an panel data analysis

The rapid growth of non-listed real estate funds over the last several years has contributed towards establishing this sector as a major investment vehicle for gaining exposure to commercial real estate. Academic research has not kept up with this development, however, as there are still only a few published studies on non-listed real estate funds. This paper aims to identify the factors driving the total return over a seven-year period. Influential factors tested in our analysis include the weighted underlying direct property returns in each country and sector as well as fund size, investment style gearing and the distribution yield. Furthermore, we analyze the interaction of non-listed real estate funds with the performance of the overall economy and that of competing asset classes and found that lagged GDP growth and stock market returns as well as contemporaneous government bond rates are significant and positive predictors of annual fund performance.

Does regional infrastructure investment stimulate extra housing and commercial building supply? Long-run evidence across the English regions

This paper uses long-term regional construction data to investigate whether increases infrastructure investment in the English regions leads to subsequent rises in housebuilding and new commercial property, using time series modeling. Both physical (roads and harbours) and social infrastructure (education and health) impacts are investigated across nine regions in England. Significant effects for physical infrastructure are found across most regions and, also, some evidence of a social infrastructure effect. The results are not consistent across regions, which may be due to geographical differences and to network and diversionary effects. However, the results do suggest that infrastructure does have some impact but follows differential lag structures. These results provide a test of the hypothesis of the economic benefits of infrastructure investment in an approach that has not been used before.

Dynamic correlations across REIT sub-sectors

The issue of whether Real Estate Investment Trusts should pursue a focused or diversified investment strategy remains an ongoing debate within both the academic and industry communities. This paper considers the relationship between REITs focused on different property sectors in a GARCH-DCC framework. The daily conditional correlations reveal that since 1990 there has been a marked upward trend in the coefficients between US REIT sub-sectors. The findings imply that REITs are behaving in a far more homogeneous manner than in the past. Furthermore, the argument that REITs should be focused in order that investors can make the diversification decision is reduced.

Capital market expectations and the London office market

The analysis of office market dynamics has generally concentrated on the impact of underlying fundamental demand and supply variables. This paper takes a slightly different approach to many previous examinations of rental dynamics. Within a Vector-Error-Correction framework the empirical analysis concentrates upon the impact of economic and financial variables on rents in the City of London and West End of London office markets. The impulse response and variance decomposition reveal that while lagged rental values and key demand drivers play a highly important role in the dynamics of rents, financial variables are also influential. Stock market performance not only influences the City of London market but also the West End, whilst the default spread plays an important role in recent years. It is argued that both series incorporate expectations about future economic performance and that this is the basis of their influence upon rental values.

The impact of energy performance certificates on the rental and capital values of commercial property assets: some preliminary evidence from the UK

This paper focuses on the effect of energy performance ratings on the capital values, rental values and equivalent yields of UK commercial property assets. Of which a small number are also BREEAM rated, the study is based upon 708 commercial property assets held in the IPD UK Universe drawn from across all PAS segments. Incorporating a range of controls such as unexpired lease term, vacancy rate and tenant credit risk, hedonic regression procedures are used to estimate the effect of EPC rating. The study finds no evidence of a strong relationship between environmental and/or energy performance and rental and capital value. Bearing in mind the small number of BREEAM rated assets, there was a small but statistically significant effect on equivalent yield only. Similarly, there was no evidence that the EPC rating had any effect on Market Rent or Market Value with only minor effects of EPC ratings on equivalent yields. The preliminary conclusion is that energy labelling is not yet having the effects on Market Values and Market Rents that provide incentives for market participants to improve the energy efficiency of their commercial real estate assets.

The sky is the limit? The determinants and constraints of European airports' commercial revenues

This study investigates the determinants of commercial and retail airport revenues as well as revenues from real estate operations. Cross-sectional OLS, 2SLS and robust regression models of European airports identify a number of significant drivers of airport revenues. Aviation revenues per passenger are mainly determined by the national income per capita in which the airport is located, the percentage of leisure travelers and the size of the airport proxied by total aviation revenues. Main drivers of commercial revenues per passenger include the total number of passengers passing through the airport, the ratio of commercial to total revenues, the national income, the share of domestic and leisure travelers and the total number of flights. These results are in line with previous findings of a negative influence of business travelers on commercial revenues per passenger. We also find that a high amount of retail space per passenger is generally associated with lower commercial revenues per square meter confirming decreasing marginal revenue effects. Real estate revenues per passenger are positively associated with national income per capita at airport location, share of intra-EU passengers and percent delayed flights. Overall, aviation and non-aviation revenues appear to be strongly interlinked, underlining the potential for a comprehensive airport management strategy above and beyond mere cost minimization of the aviation sector.

Who benefits from reducing the cost of formality? Quantile regression discontinuity analysis

This paper studies the effects of increasing formality via tax reduction and simplification schemes on micro-firm performance. It uses the 1997 Brazilian SIMPLES program. We develop a simple theoretical model to show that SIMPLES has an impact only on a segment of the micro-firm population, for which the effect of formality on firm performance can be identified, and that can be analyzed along the single dimensional quantiles of the conditional firm revenues. To estimate the effect of formality, we use an econometric approach that compares eligible and non-eligible firms, born before and after SIMPLES in a local interval about the introduction of SIMPLES. We use an estimator that combines both quantile regression and the regression discontinuity identification strategy. The empirical results corroborate the positive effect of formality on microfirms' performance and produce a clear characterization of who benefits from these programs.

Real options and game theoretical approaches to real estate development projects: multiple equilibria and the implications of different tie-breaking rules

This paper contributes to a fast growing literature which introduces game theory in the analysis of real option investments in a competitive setting. Specifically, in this paper we focus on the issue of multiple equilibria and on the implications that different equilibrium selections may have for the pricing of real options and for subsequent strategic decisions. We present some theoretical results of the necessary conditions to have multiple equilibria and we show under which conditions different tie-breaking rules result in different economic decisions. We then present a numerical exercise using the in formation set obtained on a real estate development in South London. We find that risk aversion reduces option value and this reduction decreases marginally as negative externalities decrease.

Precisely wrong or roughly right? An evaluation of development viability

This paper investigates the effect of choices of model structure and scale in development viability appraisal. The paper addresses two questions concerning the application of development appraisal techniques to viability modelling within the UK planning system. The first relates to the extent to which, given intrinsic input uncertainty, the choice of model structure significantly affects model outputs. The second concerns the extent to which, given intrinsic input uncertainty, the level of model complexity significantly affects model outputs. Monte Carlo simulation procedures are applied to a hypothetical development scheme in order to measure the effects of model aggregation and structure on model output variance. It is concluded that, given the particular scheme modelled and unavoidably subjective assumptions of input variance, that simple and simplistic models may produce similar outputs to more robust and disaggregated models.

The influence of office location on commuting behaviour

To fully appreciate the environmental impact of an office building, the transport-related carbon dioxide (CO2) emissions resulting from its location should be considered in addition to the emissions that result from the operation of the building itself. Travel-related CO2 emissions are a function of three criteria, two of which are influenced by physical location and one of which is a function of business practice. The two spatial criteria are, first, the location of the office relative to the location of the workforce, the market, complementary business activities (and the agglomeration benefits this offers) and, second, the availability and cost of transport modes. The business criterion is the need for, and therefore frequency of, visits and this, in turn, depends on the requirement for a physically present workforce and face-to-face contact with clients. This paper examines the commuting-related CO2 emissions that result from city centre and out-of-town office locations. Using 2001 Census Special Workplace Statistics which record people’s residence, usual workplace and mode of transport between them, distance travelled and mode of travel were calculated for a sample of city centre and out-of-town office locations. The results reveal the extent of the difference between transport-related CO2 emitted by commuters to out-of-town and city centre locations. The implications that these findings have for monitoring the environmental performance of offices are discussed.

Policy making without legislating: the self-regulation of commercial property leasing

The terms of a commercial property lease covers aspects such as rent, alterations to premises and the ability to leave; consequently they have a significant impact on cash flow and the ability of a business to develop. In contrast to the heavily-legislated residential sector, commercial landlords and tenants in the UK are largely free to negotiate the terms of their contract. Yet, since the property crash of 1989/90, successive governments have taken an interest in commercial leasing; in particular there is a desire to see landlords being more flexible. UK Government policy in this area has been pursued through industry self-regulation rather than legislation; since 1995 there have been three industry codes of practice on leasing. These codes are sanctioned by government and monitored by them. Yet, 15 years after the first code was launched, many in the industry see the whole code concept as ineffective and unlikely to ever achieve changes to certain aspects of landlord behaviour. This paper is the first step in considering the lease codes in the wider context of industry self-regulation. The aim of the paper is twofold: First a framework is created using the literature on industry self-regulation from various countries and industries which suggests key criteria to explain the effectiveness (or ineffectiveness) of self-regulation. This is then applied to the UK lease codes based on research carried out by the authors for the UK Government to monitor the success of all three codes. The outcome is a clearer understanding of the possibilities and limitations of using a voluntary solution to achieve policy aims within the property industry.

Eco-labeling, rents, sales prices and occupancy rates: do LEED and Energy Star labeled offices obtain multiple premiums?

Drawing upon an updated and expanded dataset of Energy Star and LEED labeled commercial offices, this paper investigates the effect of eco-labeling on rental rates, sale prices and occupancy rates. Using OLS and robust regression procedures, hedonic modeling is used to test whether the presence of an eco-label has a significant positive effect on rental rates, sale prices and occupancy rates. The study suggests that estimated coefficients can be sensitive to outlier treatment. For sale prices and occupancy rates, there are notable differences between estimated coefficients for OLS and robust regressions. The results suggest that both Energy Star and LEED offices obtain rental premiums of approximately 3%. A 17% sale price premium is estimated for Energy Star labeled offices but no significant sale price premium is estimated for LEED labeled offices. Surprisingly, no significant occupancy premium is estimated for Energy Star labeled offices and a negative occupancy premium is estimated for LEED labeled offices.

Designer buildings: an evaluation of the price impacts of signature architects

This study investigates whether commercial offices designed by signature architects in the United States achieve rental premiums compared to commercial offices designed by nonsignature architects. Focusing on buildings designed by winners of the Prizker Prize and the Gold Medal awarded by the American Institute of Architects, we create a sample of commercial office buildings designed by signature architects drawing on CoStar's national database. We use a combination of hedonic regression model and a logit model to estimate the various rent determinants. While the first stage measures the typical rental price differential above the typical building in a particular sub-market over a specific timeframe, the second stage identifies a potential price differential over a set of buildings closely matched on important characteristics (such as age, size, location etc.). We find that in both stages offices design by signature architects exhibit a premium. However these results are preliminary. The premium could be indeed an effect of the name of the architect, but others factors such as micro-market conditions might be the cause. Further tests are needed to confirm the validity of our results.