Direct Property Market Research Articles

Artificial intelligence, news sentiment, and property market liquidity

PurposeThe purpose of this paper is to use a text-based sentiment indicator to explain variations in direct property market liquidity in the USA.Design/methodology/approachBy means of an artificial neural network, market sentiment is extracted from 66,070 US real estate market news articles from the S&P Global Market Intelligence database. For training of the network, a distant supervision approach utilizing 17,822 labeled investment ideas from the crowd-sourced investment advisory platform Seeking Alpha is applied.FindingsAccording to the results of autoregressive distributed lag models including contemporary and lagged sentiment as independent variables, the derived textual sentiment indicator is not only significantly linked to the depth and resilience dimensions of market liquidity (proxied by Amihud’s (2002) price impact measure), but also to the breadth dimension (proxied by transaction volume).Practical implicationsThese results suggest an intertemporal effect of sentiment on liquidity for the direct property market. Market participants should account for this effect in terms of their investment decisions, and also when assessing and pricing liquidity risk.Originality/valueThis paper not only extends the literature on text-based sentiment indicators in real estate, but is also the first to apply artificial intelligence for sentiment extraction from news articles in a market liquidity setting.

Can Real Estate Investors Avoid Specific Risk?

Using modern portfolio theory, the traditional asset allocation process employs measurements of risk and return delivered by asset classes—for example, stocks, bonds, and real estate—to build efficient portfolios. To build efficient portfolios in practice using this type of analysis requires that the risk and return characteristics of the asset class can be replicated in real portfolios. This may be true of stocks and bonds, but is it true of real estate? Using new analysis coupled with previous UK‐based research based on the uniquely rich MSCI (IPD) dataset for UK direct real estate, this paper compares the risk and return characteristics of real estate investment approaches (direct exposure, balanced and specialist unlisted funds, a multi‐manager approach, and listed securities) relative to a UK market index. Based on a random stochastic simulation of historic performance data from 2003 to 2012, we conclude that the difficulty of diversifying away specific risk in such a lumpy asset class means that it is extremely difficult and/or costly to access or replicate direct property market returns. This suggests that an investor/manager setting out to deliver returns in line with a market index would have to demonstrate significant levels of skill. While listed real estate, which is more readily diversifiable, fails to deliver returns that are correlated with direct real estate in the short term (one to five years), it is clear that multi‐manager strategies were able to deliver returns that more effectively replicated a direct benchmark. However, multi‐manager fees negatively impacted on net returns. Specific risk can be avoided by real estate investors, but at a cost.

The Use of Listed Real Estate Securities In Asset Management

Investors have historically used listed real estate to achieve a number of outcomes, ranging from general exposure to the asset class to meeting specific returns characteristics such as inflation hedging and taxefficient income generation. However, following the events of the last five years, in common with other asset classes there is currently a re-assessment of the risk and return profile of listed real estate. The purpose of this study is twofold: (i) to conduct a review of academic literature and evidence on the use and performance of listed real estate, both as a separate asset class and in multi-asset portfolios, and (ii) to examine in detail how institutions are using listed real estate to achieve their investment objectives, and the role listed real estate is playing in the new fund structures they are creating to meet investor objectives. A review of the literature suggests that in the short-term listed real estate displays similar risk and return characteristics to the stock market rather than the direct property market, with higher levels of observed volatility and high positive correlations to the stock market. However, an analysis of returns over longer time periods indicate that there is a common real estate factor that drives the returns of both the direct and listed markets and that pricing in the listed market leads direct market indices. Whether this can lead to arbitrage is much less clear, as direct market indices may lag the direct market. In a multi-asset portfolio the inclusion of listed real estate can provide both return enhancement and risk reduction to the portfolio, although recent evidence suggests that the diversification benefits may be reduced during periods of financial distress, with the correlation and sensitivity to movements in the stock market increasing. When including both direct and listed real estate in a multi-asset portfolio there is some evidence to suggest that the inclusion of both enhances the overall portfolio return and reduces (diversifies) portfolio risk. With regard to practical applications, we find that listed real estate is being used to fulfil an increasing number of investment objectives, both as a separate asset class and in conjunction with other assets such as unlisted funds, direct property, and infrastructure/commodities. The reason for this popularity with both asset allocators and retail investors lies in the specific and definable investment characteristics which listed real estate can provide; greater liquidity than direct real estate, the returns that are linked to it, an above-average and secure dividend stream, a form of protection against future inflation shocks, and a geared exposure to improving asset prices.

Why Do REIT Returns Poorly Reflect Property Returns? Unrealizable Appreciation Gains due to Trading Constraints as the Solution to the Short‐Term Disparity

This study addresses the short‐term disparity between REIT returns and direct property returns, and argues that this phenomenon is due to the trading constraints in the direct property market imposed on REITs (the dealer rule). This renders REITs unable to time markets in order to realize short‐term property appreciation profits, making REITs primarily a property income investment rather than a full property investment, and explains the observed disparity. Empirically, I find that REIT returns consistently reflect property income returns, but not property appreciation returns. This makes this study the first in the literature to find a consistent link between REIT returns and any portion of direct property returns at short time horizons, in the context of a linear factor model. I then set up a natural laboratory to test the trading‐constraints explanation by examining the appreciation dependence of different types of REITs, which should be differently affected by the trading constraints. I find that returns to UPREITs, which are less affected by the constraints, have a stronger appreciation dependence than returns to regular REITs. I also perform a size test and find that large REITs, which are less affected by the constraints, have a stronger appreciation dependence than small REITs. When testing the effects of UPREIT and size characteristics simultaneously, I find a consistent UPREIT effect. I further find that Real Estate Operating Companies (REOCs), which are not subject to trading constraints, show short‐term property appreciation dependence. These findings offer strong support for the trading‐restrictions explanation.

Bias or rationality? The case of UK commercial real estate investment

PurposeThe purpose of this paper is to test the hypothesis that investment decision making in the UK direct property market does not conform to the assumption of economic rationality underpinning portfolio theory.Design/methodology/approachThe developing behavioural real estate paradigm is used to challenge the idea that investor “man” is able to perform with economic rationality, specifically with reference to the analysis of the spatial dispersion of the entire UK “investible stock” and “investible locations” against observed spatial patterns of institutional investment. Location quotients are derived, combining different data sets.FindingsConsiderably greater variation in institutional property holdings is found across the UK than would be expected given the economic and stock characteristics of local areas. This appears to provide evidence of irrationality (in the strict traditional economic sense) in the behaviour of institutional investors, with possible herding underpinning levels of investment that cannot be explained otherwise.Research limitations/implicationsOver time a lack of distinction has developed between the cause and effect of comparatively low levels of development and institutional property investment across the regions. A critical examination of decision making and behaviour in practice could break this cycle, and could in turn promote regional economic growth.Originality/valueThe entire “population” of observations is used to demonstrate the relationships between economic theory and investor performance exploring, for the first time, stock and local area characteristics.

The performance gap in UK property returns

PurposeWhen one talks of the return performance one typically refers to an average buy‐and‐hold return, also known as time‐weighted return. However, the returns of investors can be quite different. Investor returns are determined not only by the returns on the underlying assets but also by the timing and magnitude of their capital flows into and out of these assets. To account for the annual‐to‐annual variation in assets under management, a dollar‐weighted return has to be calculated. The difference between time‐weighted returns and dollar‐weighted returns is known as the performance gap. The purpose of this paper will be to investigate this in the UK property market.Design/methodology/approachUsing an approach similar to that of Dichev the authors examine the performance gap in the UK direct property market using historical return data for 45 market‐segments over the time period 1981‐2009.FindingsThe results show that the performance gap was negative, i.e. investor returns were greater than asset returns. That is, UK direct property investors have shown greater returns than their underlying investments. This implies that estimates of the performance of the UK property market based on property returns do not reflect the experience of investors as a group.Originality/valueThis study provides the first evidence of the performance gap in the UK direct real estate market.

Why Do Reit Returns Poorly Reflect Property Returns? Unrealizable Appreciation Gains Due to Trading Constraints as the Solution to the Short-Term Disparity

This study addresses the short-term disparity between REIT returns and direct property returns, and argues that this phenomenon is due to the trading constraints in the direct property market imposed on REITs (the dealer rule). This renders REITs unable to time markets in order to realize short-term property appreciation profits, making REITs primarily a property income investment rather than a full property investment, and explains the observed disparity. Empirically, I find that REIT returns consistently reflect property income returns, but not property appreciation returns. This makes this study the first in the literature to find a consistent link between REIT returns and any portion of direct property returns at short time horizons, in the context of a linear factor model. I then set up a natural laboratory to test the trading-constraints explanation by examining the appreciation dependence of different types of REITs, which should be differently affected by the trading constraints. I find that returns to UPREITs, which are less affected by the constraints, have a stronger appreciation dependence than returns to regular REITs. I also perform a size test and find that large REITs, which are less affected by the constraints, have a stronger appreciation dependence than small REITs. When testing the effects of UPREIT and size characteristics simultaneously, I find a consistent UPREIT effect. I further find that Real Estate Operating Companies (REOCs), which are not subject to trading constraints, show short-term property appreciation dependence. These findings offer strong support for the trading-restrictions explanation.

Can listed property shares be a surrogate for direct property investment behaviour?

The listed property sector in South Africa has grown to a size which could be considered to be a good representation of the income producing property market in general. Stock market listed property investment funds offer the opportunity to compare indirect property investment to direct property investment, which could bridge the gap between irrational investment behaviour and intrinsic asset values. This study investigates the relationship between listed property share prices and the property values in listed property funds. The share prices are correlated with various factors, such as the accounting ratios of the companies, the financial statements of the companies and general economic variables. The outcome of the study is an explanation of the behaviour of listed property shares, and its relationship to the direct property market and the general economy. This would assist in the explanation of market behaviour and provides the opportunity to more accurately predict portfolio asset values, which might be used in the valuation of individual real estate assets.

Pricing of Real Estate Specific Market Risks for Worldwide 66 Countries

I address the construction of hurdle rates for 66 countries that adequately compensate investors for the real estate specific market risks involved when investing, operating and exiting a foreign market. To estimate the market-based framework, I run random effect panel regressions for a period of six years from 2004-2009 of IPD direct property market returns and an integral and newly developed composite index that takes into account all real estate market and investment specific conditions. The regression results provide direct evidence that an increased perception of risk and instability in the countries' socio-economic conditions and institutional frameworks significantly imply higher investors' return expectations. Finally, the results provide international investors with an absolute hurdle rate that prices risks and opportunities of national real estate markets and guides investors in selecting a core, value-add, or opportunistic investment strategy.

Pricing of Specific Real Estate Market Risks for 66 Countries Worldwide

I address the construction of hurdle rates for 66 countries that adequately compensate investors for the specific real estate market risks involved when investing, operating and exiting a foreign market. To estimate the market-based framework, I run random-effect panel regressions over a six-year period (2004-2009) using IPD direct property market returns and a recently developed, integral composite index that takes into account all real estate market and investment-specific conditions. The regression results demonstrate that an increased perception of risk and instability in the countries’ socio-economic conditions and institutional frameworks imply higher investor return expectations. Finally, the results provide international investors with an absolute hurdle rate that prices the risks and opportunities of national real estate markets and guides investors in the decision between a core, value-add, or opportunistic investment strategy.

REIT-Based Property Return Indices: A New Way to Track and Trade Commercial Real Estate

Using REIT return data, bond data, and property holding data, the authors construct property market segment-specific indices of asset returns. The authors show that these <i>pure-play</i> indices can be employed to make pure, targeted investments in the commercial real estate market while retaining the liquidity, transparency, and pricing efficiency benefits of the well-developed public market in REITs. These pure-play indices compare favorably with existing property market return indices, displaying volatilities similar to transaction-based indices, such as the Moody’s/REAL Commercial Property Price Index, but tending to lead the private market in time. The pure-play indices can be generated at a daily frequency without significant noise and at various levels of market segment granularity and, notably, have led the transactions-based direct property market indices during the recent market downturn. The authors’ findings suggest that the REIT-based pure-play indices may provide a unique, new information source about the commercial property market, as well as a unique capability to facilitate targeted investments, construct hedges, and potentially support derivatives trading. <b>TOPICS:</b>In markets, real estate, options

Evaluating the investment attributes and performance of property companies

This study utilises style analysis to examine the effective asset mix of UK property companies, using both an unadjusted data set and one adjusted for leverage and general stock market sentiment. The findings illustrate that the style benchmarks are largely spilt between mid and small cap stocks and government bonds, while when the adjusted data set is examined, the role of fixed‐income securities is enhanced together with that of Treasury Bills and the direct property market. The resulting style portfolios are then used to assess the investment performance of the property companies. The results reveal that there is a high degree of consistency in terms of the performance ranking obtained, across both alternative performance measures and between the original and adjusted samples. However, very few of the performance statistics are found to be statistically significant at conventional levels.