Equity Real Estate Research Articles

Futures markets and real estate public equity: Connectivity of lumber futures and Timber REITs

This paper investigates connectivity between lumber futures contracts, Timberland REITs, the FTSE NAREIT U.S. REIT index, spot prices, and timberland capitalization rates, and contributes to this tranche of research by empirically linking the price discovery process of Timberland Real Estate Investment Trusts to lumber futures. We employ VEC and GARCH models, providing evidence that lumber futures have a positive significant long- and short-run equilibrium relationship with publicly traded Timber REIT prices, connecting a specific futures commodity with its theoretically entwined real estate equity index. As such, exogenous factors that influence Timber REIT prices are documented leading to possible diversification/risk reduction strategies.

Fee Structures in Private Equity Real Estate

Although fees in real estate are important for investors and fund managers, they have received little attention in the finance literature. In this paper, I examine fee structures for private equity real estate funds from an investor's perspective. Fee structures, as proposed by fund managers in placing documents, are used to calibrate the total fee load. The average total fee load for closed-end funds equals 2.7%, which is substantially lower than for private equity funds. Through regression and simulation, I show that core and value-add funds charge significantly lower performance fees compared with opportunistic funds, although there is no difference in management fees. Moreover, larger funds charge significantly less management fees. Investors can substantially reduce fees by controlling the amount of leverage and avoiding commitment fees and catch-ups.

Effects of Gainsharing Provisions on the Selection of a Discount Rate for a Defined Benefit Pension Plan

This paper examines the effect of gainsharing provisions on the selection of a discount rate for a defined benefit pension plan. The paper uses a traditional actuarial approach of discounting liabilities using the expected return of the associated pension fund. A stochastic Excel model was developed to simulate the effect of varying investment returns on a pension fund with four asset classes. Lognormal distributions were fitted to historical returns of two of the asset classes; large company stocks and long-term government bonds. A third lognormal distribution was designed to represent the investment returns of alternative investments, such as real estate and private equity. The fourth asset class represented short term cash investments and that return was held constant. The following variables were analyzed to determine their relative impact of gainsharing on the selection of a discount rate: hurdle rate, percentage of gainsharing, actuarial asset method smoothing period, and variations in asset allocation. A 50% gainsharing feature can reduce the discount rate for a defined benefit pension plan from 0.5% to more than 2.5%, depending on the gainsharing design and asset allocation.

New York biotech incubator opens

Alexandria Real Estate Equities has opened its LaunchLabs facility for life sciences and technology firms in New York City. About 13 start-ups focused on areas such as 3-D printing of live tissue, computational drug discovery, and cancer vaccines are taking up residence at the facility. New resident Neochromosome, a maker of synthetic chromosomes, won a $100,000 entrepreneurship prize to mark LaunchLabs’ opening.

Unexpected Inflation, Capital Structure, and Real Risk‐adjusted Firm Performance

Managers can improve real risk‐adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk‐adjusted returns to unexpected inflation. The net asset value of US equity real estate investment trusts (REITs) serves as a good proxy for nominal assets and, accordingly, we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real risk‐adjusted performance, and (ii) their inflation‐hedging qualities are inversely related to deviations from this ‘matching‐nominals’ argument. In addition to providing managers with a vehicle to maximize real risk‐adjusted performance, our findings also provide investors with the tools to infer inflation‐hedging qualities of equity investments.

Real Estate Investing: Opportunities and Challenges

This paper discusses the main ways of gaining exposure to real estate, with theirassociated advantages and drawbacks. We also present figures on the market size ofthe various types of exposure. We consider direct investments, listed investments,open-ended real estate funds and private equity real estate investments. Our discussion should help investors in deciding whether real estate should be consideredas an investment alternative and if so, what the best way of entering the market is.

International Real Estate Review

We examine the market for U.S. equity real estate investment trusts (REITs) for evidence of the volatility effect, in which low volatility stocks tend to outperform high volatility ones, as has been found in the general equity market by prior research. While there is some evidence of a volatility effect in the first ten years of the sample, this disappears in a more recent time period. Furthermore, we test the efficacy of low risk portfolio construction techniques and find that none perform any better than a market cap weighted portfolio ¡V although they are also no worse ¡V over any of the time periods examined. Thus, there is no evidence that using a risk-based portfolio design that emphasizes low volatility would improve portfolio performance for a REIT allocation.

Direct Estimation of Factor Exposures from Appraisal Returns

Valuation of alternative assets such as private equity and commercial real estate are appraisal based, rather than marked-to-market. Empirical studies show that appraisal based returns tend to be smoothed and exhibit strong autocorrelation, which creates a stale-pricing bias. In this paper, we have described the weaknesses of the current approaches to estimating risk factors for alternative assets. We then introduce a new method for estimating risk factor exposures which avoids these weaknesses. We also argue that misspecification of appraisal frequency may be the reason why factor sensitivities estimated from appraisal returns tend to be smaller than those estimated on underlying cash flows. Finally, we illustrate the application of the new method to popular measures of return for private equity and real estate.

Perspective of Developer, Buyer, Financier and Equity Participants in Real Estate Project Development Process in India: An important constituent of Construction Industry

The real estate project development is an important constituent of construction industry. The other important constituent of construction industry is infrastructure development. The construction industry drives and impacts many other industries and has a substantial multiplier effect on various sectors and hence on economic output as well as on employment scenarios. This article discusses multiplier effect of construction industry on few of the important economic indicators and further focuses on real estate project development process. The real estate project development process starts from land acquisition to sales and marketing. The internal stakeholders in real estate project development process are real estate developers, real estate buyers and the real estate financers. The paper discusses alternatives for real estate developers, the opportunistic schemes for real estate buyers, and the role of portfolio of financing agencies as well as the role of multitudes of equity participants. It also describes about the regulatory institutions active in real estate project development and promotion process. The real estate projects are developed by organized real estate project developer as well as by unorganized real estate project developers or local builders. This article contributes regarding the challenges and opportunities among the real estate buyers, real estate developers, portfolio of financial schemes offered by real estate financers and the opportunities for real estate equity participants.

Perspective of Developer, Buyer, Financier and Equity Participants in Real Estate Project Development Process in India: An important constituent of Construction Industry

The real estate project development is an important constituent of construction industry. The other important constituent of construction industry is infrastructure development. The construction industry drives and impacts many other industries and has a substantial multiplier effect on various sectors and hence on economic output as well as on employment scenarios. This article discusses multiplier effect of construction industry on few of the important economic indicators and further focuses on real estate project development process. The real estate project development process starts from land acquisition to sales and marketing. The internal stakeholders in real estate project development process are real estate developers, real estate buyers and the real estate financers. The paper discusses alternatives for real estate developers, the opportunistic schemes for real estate buyers, and the role of portfolio of financing agencies as well as the role of multitudes of equity participants. It also describes about the regulatory institutions active in real estate project development and promotion process. The real estate projects are developed by organized real estate project developer as well as by unorganized real estate project developers or local builders. This article contributes regarding the challenges and opportunities among the real estate buyers, real estate developers, portfolio of financial schemes offered by real estate financers and the opportunities for real estate equity participants.

On the Interest Rate Sensitivity of REITs: Evidence from Twenty Years of Daily Data

Executive Summary. In this study, we evaluate interest rate sensitivity for equity real estate investment trusts (REITs) using a multi-factor asset pricing model estimated with daily data. We utilize yield changes and, as an alternative, bond betas, to measure REITs' sensitivity to interest rate shifts.We find that the degree of interest rate sensitivity varies over time, has switched direction, and that any “pure” effect is often subsumed in equity REITs beta against stocks. Despite recent high sensitivity, we conclude that there is no long-run predictive rule that applies to how equity REIT returns respond to movements in interest rates.

Significance of Real Estate Fund Management in India

Private equity real estate (PERE) in developing markets has limited reliable publically available data. In this paper, we analyze the transaction data of PERE in India for the 2005–2015 period. Investments during this period are classified into three phases depending on major policy, economic, and political events that shaped these investment phases. These three phases are 2005–2008, 2009–2013, and 2014–2015. During the first phase, opportunistic equity investments in development assets were favored by investors. In the second phase, equity investments got transformed to structured debt. During the third phase, long-term investment by institutional investors and fund managers in the form of platform transactions took place. REITs, Housing for All by 2022, Smart City Mission, tax reforms, and other government initiatives are likely to improve transparency and corporate governance in real estate. These initiatives will help to grow investments and organize the real estate industry in India.

On the Transmission of Spillover Risks between the Housing Market, the Mortgage and Equity Reits Markets, and the Stock Market

In this study we examine the dynamics of return spillovers across four markets: the housing market, the mortgage and equity real estate investment trusts (REITs) markets, and the stock market in the United States. Applying the spillover index methodology by Diebold and Yilmaz (2012) on monthly data from the January 1975-December 2016 time period, we find large variations in the total, net and pairwise return spillovers across these markets. Each of the four markets acts as both receiver and transmitter of spillovers during specific subperiods. While in economic downturns the housing market is generally a transmitter of spillovers, we find that during the recent mortgage crisis the housing market was a receiver of spillovers predominantly from the mortgage REITs market but also, to a lesser degree, from the equity REITs market. We also find that investor sentiment, political uncertainty and availability of consumer credit are key determinants of the direction and intensity of spillovers across markets. In periods of high political uncertainty and in periods of easy credit, the equity REITs and the stock markets transmit spillovers to the housing and the mortgage REITs markets.

Corporate Governance, Institutional Ownership, and Their Effects on Financial Performance

This paper studies the 105 U.S. Equity Real Estate Investment Trusts for the period of 2007-2012, and explores the relationship between corporate governance, institutional ownership, and financial performance. The results are conclusive and show that the presence of women on the board of directors as well as the choice to opt for a classified board enhances the returns on assets and returns on equity. The second finding of this paper is that the percentage of stocks owned by the top 10 institutions, between the levels of 30% and 50%, are associated with higher returns on assets and returns on equity.

Is real estate private equity real estate? - Dynamic interactions between real estate private equity funds, non-real estate private equity funds, and direct real estate investments

In this study, we investigate long- and short-run synchronicity of the US-focused non-core real estate private equity (REPE) fund indices in relation to direct real estate (RE) and non-real estate private equity fund (PE) indices. We test cointegration relationships between the indices and specify different vector error correction models for opportunistic and value-added REPE funds. Our results are robust to various model specifications and suggest that in the long-run risk and return of both, opportunistic and value-added REPE markets follow the direct real estate market more closely than the private equity market. Moreover, short-run opportunistic REPE returns are significantly cointegrated with the direct real estate as well as the private equity market. For value-added REPE fund returns, we find short-run interactions only with the private equity market, but not with the real estate market. Based on the risk/return characteristics, we suggest to use the term real estate private equity over private equity real estate, as value-added and opportunistic real estate funds are a lot closer related to direct real estate than to private equity.

New York City gets biotech incubator

Alexandria Real Estate Equities is building what it calls a first-of-its-kind biotech incubator in New York City. Alexandria LaunchLabs will open in 2017 with more than 1,400 m2 of lab and office space at the Alexandria Center for Life Science on Manhattan’s East Side. At the same time, Alexandria is forming a seed capital fund that will make up to $25 million available to companies that emerge from New York City’s academic labs. Tenants of LaunchLabs will have priority access to funds.

REIT Stock Price Volatility and the Effects of Leverage

This article sheds light on several puzzling empirical observations. We examine the volatility implications of equity Real Estate Investment Trust (REIT) stock returns over the sample period from January 1985 through October 2012. We find a negative “leverage effect” in the pre‐ and post‐Greenspan era, but not during the Greenspan era (circa 1994–2006). We argue that the positive elasticity of variance with respect to the value of equity during the Greenspan era can be explained by a decline in the spread between the yield on commercial mortgages and 10‐year Treasuries, which triggered a wealth transfer from REIT equity holders to REIT debt holders. We also argue that the declining commercial‐mortgage‐10‐year‐Treasury yield spread during the Greenspan era allowed REITs to take on far more risk than most people realized. We then document that average REIT stock return volatility increased significantly in the 2007–2010 period in the midst of a historic decline in REIT stock prices. The results have significant implications for the good deal of interest and debate in the media over the status of REITs and whether equity REITs have become excessively risky relative to the returns they generate.

Real Estate Company Reactions to Financial Market Regulation

This study investigates the impact of international financial regulation on listed real estate companies. In particular, we look at how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns and credit default swap (CDS) spreads of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector, the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool, while the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily financial market data and identify the regulatory events through news in the media. Regulatory event are identified based on news articles in major international financial newspapers and news agencies related to above regulations. The results show that, on average, market participants trading real estate equities and CDSs respond significantly to announcements about Basel III, AIFMD and EMIR, however, we observe differences across the countries the types of companies (large versus small, more leveraged versus less leveraged) and across the regulations. The strongest effects for equity are associated with Basel III and AIFMD. The effects on the credit side are much larger in scale but less frequent. The impact of the regulatory reforms is strongest for UK property companies, large companies and companies with high leverage. Overall, albeit not directly, the performance of listed property companies is significantly affected by news about financial regulatory reforms.

Investment Styles, Portfolio Allocation, and Real Estate Derivatives

Chapter 14 provided numerous examples of distinctions that portfolio allocators can make when categorizing real estate. As detailed in that chapter, the primary subgroup on which real estate equity analysis is focused is commercial (incomeproducing) real estate. This chapter focuses on the analysis of commercial real estate by institutional investors. It also introduces the most important real estate derivatives available in the marketplace, as well as their uses by institutional investors.

Does asset liquidity matter? Evidence from real estate stock markets

Purpose– The purpose of this paper in this context is to examine the impact of asset liquidity on real estate equity returns, after taking well-documented systematic risk factors into account. Due to their unique characteristics, real estate equities constitute an inherently low degree of underlying asset liquidity.Design/methodology/approach– Following the Fama-French time-series regression approach, the authors extend the conventional asset pricing model by a real estate-specific asset liquidity factor (ALF), using a sample of 244 real estate equities.Findings– The results, based on monthly data for the period 1999-2012, reveal that asset liquidity is a relevant pricing factor which contributes to explaining return variations in real estate equity markets. Accordingly, investors expect a risk premium from listed real estate companies with a low degree of asset liquidity, which is especially the case for companies facing financial constraints and during economic downturns. Furthermore, an investment strategy exploiting differences in the underlying asset liquidity yields considerable average excess returns of upto 8.04 per cent p.a.Practical implications– Considering the findings presented in this paper, asset liquidity should receive special attention from investors, as well as from the management boards of listed real estate companies. While investors who ignore the magnitude of asset liquidity may systematically misprice real estate equities, management can influence the firm’s cost of capital by adjusting the underlying asset liquidity.Originality/value– This is the first study to examine the role of an ALF in a real estate asset pricing framework.