Abstract
Real estate indices often rely on strong constant quality assumptions and are too general to be carefully considered by investors. Hedonic techniques are more rigorous than median-price measures to control for quality of the assets in place and the quality of the assets that are put on the market at different times. This research aims to investigate how these limitations affect the usefulness of indicators available in the Brazilian market and how specialized, technically superior (and relatively easy-to employ), indices can contribute to improve performance measurement in emerging real estate markets. To do this, we use an appraisal-based rent dataset from Sao Paulo to create two types of time-dummy measures for office properties. To our records, there appears to be no studies that cover the recent meltdown in this market in such level of detail or that compare the performance of different time-dummy methods. The first model ⬜ standard ⬜ includes time dummies, submarket dummies and property-specific attributes as controls for building quality. The second ⬜ fixed effect ⬜ is an alternative model, where we consider time dummies, time-varying characteristics and property-specific fixed effects. The latter approach deals with time-unvarying locational and property-specific unobserved heterogeneity. Our results reinforce that obtuse measures available often fail to disentangle specific aspects of real estate cycles, which tend to be quite prominent in emerging real estate markets.
Highlights
Research on economic indices is well established in the finance literature, especially when it comes to liquid investment opportunities, such as equity markets (i.e. Hull & McGroarty, 2014; Nardy, Fama, Guevara, & Mussa, 2015; Orsato, Garcia, Mendes-Da-Silva, Simonetti, & Monzoni, 2015)
Investors are interested in aggregate measures of illiquid assets, such as commercial real estate (CRE) price and rent growth, as they provide a useful benchmark of financial performance and enables lenders to value collateral more accurately
The dataset was extracted from CRE Tool, a system which offers an extensive appraisal dataset for office properties located in various Brazilian cities
Summary
Research on economic indices is well established in the finance literature, especially when it comes to liquid investment opportunities, such as equity markets (i.e. Hull & McGroarty, 2014; Nardy, Fama, Guevara, & Mussa, 2015; Orsato, Garcia, Mendes-Da-Silva, Simonetti, & Monzoni, 2015). Investors are interested in aggregate measures of illiquid assets, such as commercial real estate (CRE) price and rent growth, as they provide a useful benchmark of financial performance and enables lenders to value collateral more accurately. While this literature is present in developed countries Reliable data is unavailable to the broader public. Even when such data is available, it is difficult to find long time series to build reasonable econometric estimates. The lack of quantitative information; does not undermine the relevance of CRE as an alternative investment opportunity in large developing economies
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