European Real Estate Research Articles

European real estate equities: ownership structure and value of the firm

PurposeThe relationship between ownership structure and firm value has long been of interest in the academic society. The purpose of this paper is to study the relationship between European real estate investment trusts' (REITs) ownership structure and the observed firm value as measured by market‐to‐book (M/B) ratio. In addition, the potential effects of differing REIT ownership structures on other financial ratios, such as return on equity (ROE) and return on assets (ROA), are analyzed. Finally, the potential impact of strategic/insider ownership on REITs is assessed.Design/methodology/approachSeveral “difference between means” tests are run. In each test, the studied group of REITs is divided into three groups according to set criteria. Then, the potential differences observed between the groups are documented, analyzed and reported. Finally, statistical significance of the potential differences among groups is tested.FindingsFirst, consistent with the previous studies, this study shows that increasing REIT block ownership results in lower M/B ratios as well as decreased dividend yield, ROE and ROA. In other words, the results suggest that, in terms of M/B ratio, the markets value REITs with low block holdings slightly higher than those with more block holders. However, the relationship is not totally explicit. Second, the relationship between strategic/inside ownership and firm value (and other financial measures) is somewhat obscure. The effects of strategic ownership are an interesting topic, also in terms of potential future research.Practical implicationsOne of the fundamental ideas behind REIT legislation is to provide investors with a liquid means of investing in indirect real estate by regulating the ownership structure of the vehicle. The results of this study suggest that the more dispersed the shareholder structure, the higher the firm value, potentially due to increased stock liquidity. This finding could serve as an indication to lawmakers that the REIT ownership regulations not only work in theory but in practice, too.Originality/valueFor the first time in an academic context, the relationship of European REIT ownership structures and firm value is studied in‐depth. Proven scientific methods are employed to discern potential, yet unrevealed patterns between REIT ownership and firm value.

Time series behavior of average dynamic conditional correlations in European real estate securities markets

PurposeThe purpose of this paper is to investigate the time series behavior of co‐movements among 11 European real estate securities markets, with each other as well as between country‐averages, over the sample period from January 1999 to January 2010 by utilizing the asymmetric dynamic conditional correlation (ADCC) technique, long‐memory tests and multiple structural break methodology.Design/methodology/approachFirst the ADCC from the multivariate GJR‐GARCH model is used to estimate the pair‐wise conditional correlations between the 11 securitized real estate markets. Then, the 11 country‐average conditional correlation series is subject to a battery of four long‐memory tests to form an “on the balance of evidence” picture; the semi‐parametric Geweke and Porter‐Hudak procedure and Robinson test, as well as the non‐parametric Hurst‐Mandelbrot R/S and Lo's modified R/S tests. Finally, the Bai and Perron's multiple structural break methodology seeks to test whether the average conditional correlations are subject to regime switching via the detection of breaks in the co‐movements of real estate securities returns.FindingsLow to moderate conditional correlations are found for these European real estate securities market and a higher level of correlation in the aftermath of the global financial crisis. The long‐memory correlation effect is present for nine European real estate securities markets. In addition, the conditional correlations are subject to regime switching with two structural breaks in four country‐average correlation series. Across the regimes, a higher level of correlation is linked to a higher level of volatility and a lower level of return, and this happened around the global financial crisis period.Research limitations/implicationsThe findings that national real estate securities correlations exhibit time‐varying and asymmetric behavior can help investors understand how real estate securities will co‐move in different market scenarios (e.g. “crisis” and “non‐crisis” times). Moreover, the process of dynamic covariance analysis and forecasting (the ultimate objective in portfolio management) should not rely too much on short‐term autoregressive moving average models. Instead, a combination of some appropriate long‐range dependence models and regime‐switching specifications is needed.Originality/valueThis paper offers useful insights into the time series behavior of average dynamic conditional correlations in European public property markets.

Fair Value and Audit Fees

This paper investigates the effect of fair value reporting and its attributes on audit fees. We use as our primary sample the European real estate industry around mandatory IFRS adoption (under which reporting of property fair values becomes compulsory), due to its unique operating and reporting characteristics. We document lower audit fees for firms reporting property assets at fair value relative to those employing depreciated cost ― a difference that appears driven (in part) by impairment tests that occur only under depreciated cost. We further find that audit fees are decreasing in firm’s exposure to fair value, and increasing both in the complexity of the fair value estimation and for recognition (versus only disclosure) of fair values. We corroborate our findings in two alternative settings: contrasting UK and US real estate firms; and using UK investment trusts. Overall, the results suggest that fair values can lead to lower monitoring costs; however, any reductions in audit fees will vary with salient characteristics of the fair value reporting, including the difficulty to measure and the treatment within the financial statements.

Asset Pricing in European Real Estate Equity Markets

The study provides insight into the pricing of publicly traded European real estate equities. The Fama-French three-factor model, as well as unconditional and conditional Fama-MacBeth regressions are applied to a sample of 275 real estate equities from 16 European countries over the period 1988 to 2009. The results show that within the real estate equity market, a significant value effect exists, while no small-size effect is present. Real estate equity returns vary significantly with the excess market return and a pan-European value factor. Moreover, returns are driven by a systematic size factor, although this effect is not as pronounced. The findings further indicate a better integration of the European real estate equity market with the general equity market from 1999 onwards. Consistent with other asset pricing studies, no factor risk loading proves to be consistently priced in unconditional asset pricing tests. However, the study reveals the explanatory power of systematic risk factors, especially beta, when conditioned on both general and real estate market states.

Disentangling the Short and Long-Run Effects of Occupied Stock in the Rental Adjustment Process

In the current stand of literature on the rental adjustment process starting with Hendershott et al. (Real Estate Economics, 30, 165-183, 2002a, Journal of Real Estate Finance and Economics, 24, 59-87, 2002b) it has become practice to treat the compound variable “occupied stock” as a supply variable. In this study we show that this variable deserves a more critical investigation and that the general view of a supply variable may be misleading. Using panel data covering 30 urban areas for 17 years, we investigate the rental adjustment process in the German office market. The application of recently developed cointegration techniques for non-stationary panel data in conjunction with the corresponding error correction model (ECM) enables us to overcome the data limitations, particularly existent for most European real estate markets. Hence, our primary motivation is (a) to demonstrate how “occupied stock” should be interpreted correctly and (b) to provide useful insights into the long-term relationships and short-run dynamics of real office prime rents. The empirical evidence suggests that a one percent rise in office employment increases real rents on average by 1.64% through higher demand for office space. On the other hand, a one percent increase in the supply of office space decreases real rents in the long run by 2.25%. The results from the error correction model show that deviations from the long-run equilibrium lead to an adjustment process which restores equilibrium within approximately 3 years.

Investing in European market real property through reits

Investing in European market real property through reitsFor institutional and private investors, investing in real estate represents an attractive form of the consignment of their money. Real estate provides a regular source of income in the form of the rent from or interest on the credit provided. At the same time, real estate is a good investment instrument, because it provides diversified contributions and security against inflation for investors. In their efforts to diversify risk, investors are expressing growing interest in investing in the whole European Union. The success of Real Estate Investment Trusts (REITs) in the U.S. also opened the door for investing in this market for small investors, which is the reason for the development of this type of investment company in the European arena. One problem concerning the development of European real estate investment funds is the unsolved issue of the harmonization of the legislation and regulatory safety measures, which would enable the creation of a common market for new investment products in Europe.

The evolution of institutional arrangements to support the internationalisation of real estate involvements

PurposeThe purpose of this paper is to provide an analysis of the evolution of institutional arrangements to support the internationalisation of real estate involvements in European markets.Design/methodology/approachUsing a broadly institutional economics approach to markets the paper first outlines a market rational for institutional arrangements to support internationalisation and then examines how such arrangements have evolved in the context of European real estate markets.FindingsSignificant new institutional arrangements have evolved to support the internationalisation of real estate involvements in Europe. The need to address the information costs and new information requirements necessitated by internationalisation has been a key driver of institutional formation. Both regulatory and informal barriers to internationalisation have also been important drivers of the evolution of new institutional arrangements to support internationalisation. Taken collectively the new institutional arrangement identified should be viewed as a significant step change in the structure of European real estate markets. Broad market evidence points to the success of these arrangements.Originality/valueThe paper provides the first systematic account of the evolution of new institutional arrangements to support the internationalisation of real estate involvements in Europe. It identifies the key drivers of institutional formation and provides a sketch of the key characteristics of the institutions which have evolved.

Real estate education in Europe: some perspectives on a decade of rapid change

PurposeThe purpose of this paper is to provide a profile of the structure of real estate education provision in Europe, its key recent drivers and some ideas for its future development.Design/methodology/approachThe paper provides an analysis of recent trends in provision based on the European course accreditation data provided by the Royal Institution of Chartered Surveyors (RICS). The structure of provision is examined within the context of the significant changes which have taken place in the structure of European real estate markets as a means of identifying its key drivers. The analysis goes on to consider the opportunities presented for the future development of provision by two important initiatives the “Bologna Process” and the “European Real Estate Society Education Seminar”.FindingsThere has been considerable expansion in the provision of real estate education in Europe in recent years. The postgraduate level both full‐time and part‐time has been established as the dominant mode of provision with a business school setting as an increasingly important academic context. The two initiatives examined have the potential to contribute to the development of a truly pan‐European approach to real estate education.Originality/valueThe paper provides the first systematic review of real estate education provision in Europe directly related to changes in the structure of real estate markets. It provides educators which some ideas on how to shape future provision in particular though the development of key stakeholder relationships across Europe.

Is the UK real estate market converging with the rest of Europe?

PurposeA number of studies have examined the convergence in European real estate markets and find that convergence is time‐varying. Additionally, the returns of some countries, notably the UK, are as equally, if not more, influenced by the real estate returns in the USA than those in Europe. This paper aims to study the time‐varying convergence of the UK securitised real estate market shows with countries within Europe relative to that with the USA.Design/methodology/approachThis paper utilizes a model estimated using a Kalman filter.FindingsUsing monthly data over the period 1990‐2007 we show that from 1990 to 1998 the returns of the UK securitised real estate were more influenced by the US market than the other countries in Europe. However, from autumn 1998 to 2004 the short‐run movements in the return of the UK securitised real estate market became increasingly associated with movements in the other countries in Europe market rather than the USA. But since 2004 the returns in the UK real estate have once again started to diverge from those of most countries in Europe.Originality/valueThis is the first paper to examine the time‐varying convergence of the securitised real estate markets using time‐varying parameter modelling techniques estimated by the Kalman filter. The results showing that the UK has not converged with the other markets in Europe, which implies that real estate diversification is still a viable investment strategy for UK investors in most countries in Europe.

European value added investing: leveraging structural and cyclical real estate opportunities

PurposeThe demand for value added investment in the European real estate market emerged in the mid to late 1990s and over the past decade has grown rapidly as a preferred investment style. Recent evidence suggests that investor appetite for value added products is set to intensify further. The purpose of this paper is to consider value added investment in the context of the wider market and in particular considers the rationale underpinning the current surge in demand. The paper explores the core components of its risk return profile and puts forward a strategic investment framework for European value added investment.Design/methodology/approachThis paper develops a three tier filter to enable the classification of investment style. First, the risk parameters of the key investment characteristics are considered; second, the degree of risk exposure experienced on any one dimension and finally, the combination of such risks taken at any one time.FindingsThe key findings of this paper are: the shift in capital towards real estate at the beginning of the decade brought a new investor audience to the sector. Alongside the existing investor base, their growing experience in the sector, together with steep pricing competition for core has increased their risk appetite within the sector.Originality/valueThe paper emphasizes that investment strategies focussed on delivering true risk adjusted value added returns must be capable of identifying structural change, evaluating its implications for the real estate market and analysing its impact on current and future value.

Conference report: Planning, Law and Property Rights The Third Annual Conference of the International Association of Planning, Law and Property Rights (PLPR), Aalborg, 2009

Notwithstanding what the Association's president called the 'Aalborg in February' factor (short daylight in a grey and cold North Jutland port city surrounded by pig farms), some 80 delegates, a similar number to the previous two PLPR conferences (Amsterdam in 2007 and Warsaw in 2008), attended the Association's 2009 conference at the University of Aalborg, Denmark from 11 to 13 February. The hospitality made up for the weather and time of year: a tour of regeneration sites, a welcome reception in the eighteenth-century town hall, and a conference dinner in another heritage building, the Jens Bang house. The University of Aalborg was an appropriate host, having a reputation for its educational philosophy of inter-disciplinary and problem-orientated studies organised around group and project work, preferring real-world problem-solving over more traditional examination-focused academic study. It also has a strong planning and surveying expertise, expanding into environmental areas such as sustainable energy management, and a strong international focus (some 800 international students among its student population of 12,000). The PLPR Association1 has emerged from the planning law group of the much larger conferences of AESOP (Association of European Schools of Planning) and ACSP (American Collegiate Schools of Planning), which passed the thousand delegate mark at their joint conference in Chicago in 2008 (Davoudi and Winkle, 2008). Planning law tracks have been an established feature of AESOP/ASCP conferences, and the push towards a free-standing academic association reflects the need for a large enough peer group with whom to discuss research in the area, and for a cross-national comparative perspective. Much is owed to the energy and commitment of its first president, Professor Rachelle Alterman of the Haifa Technion (Israel). The Association put its draft statutes to the Aalborg conference (and now has its own logo!), while a related International Platform of Experts in Planning Law is coming into existence.2 Some 60 high-standard papers were presented in Aalborg,3 with a more-or-less equal balance of planners and lawyers (some qualified in both), and the predominantly academic focus moderated by professional practitioners. The conference was organised without the formality of an over-arching conference theme or keynote papers. Papers were organised into two parallel streams within topic areas: 'public-private co-operation', 'comparative studies', 'planning and property rights', 'property development issues', 'land readjustment', 'public participation', 'expropriation' and 'coastal protection'. Unfortunately, time constraints limited many presentations to only 10-15 minutes; the only practical solution to this problem in future appears to be additional parallel streams. Other invited topic areas in 'enforcement' and 'real estate' attracted insufficient papers to be programmed (real estate having its own European Real Estate Society4). The 2009 PLRP conference papers reflected the trend towards globalisation and comparative planning and land law and the increasing inter-disciplinary cooperation between planners and lawyers. …

European real estate society (ERES) – providing forums for engagement

European real estate society (ERES) – providing forums for engagement

Euro Disneyland S.C.A.: The Project Financing

In 1989, the Walt Disney Company financed its major European theme park and real estate development using a variety of financing tools and techniques that, when bundled together, amounted to a project financing. The case recounts the details of this financing and invites students to evaluate the financing from various standpoints, including those of the Walt Disney Company, the government of France, European equity investors, and European banks. The resulting opinion about the attractiveness of the project ultimately hinges on beliefs about European market demand for an American-style theme park. The case may be used to exercise students' skills in valuation analysis, to illustrate techniques for financing major real-property projects, and to explore the creation and transfer of wealth in such projects.

Fair Value or Cost Model? Drivers of Choice for IAS 40 in the Real Estate Industry

The IFRS mandatory adoption in European countries is an excellent context from which to assess the validity of accounting choice theory, which postulates that information asymmetry, contractual efficiency (agency costs) and managerial opportunism reasons could drive the choice. With this aim, we test the impact of these factors to explain the adoption of fair value for investment properties (IAS 40) in the real estate industry, taking into account the ‘revaluation’ option offered by IFRS1 and using historical cost without revaluations as a baseline category for comparison purposes. We select a sample of European real estate companies from Finland, France, Germany, Greece, Italy, Spain and Sweden, all first-time adopters of the IFRS. Using a multinomial logistic model, we show that information asymmetry, contractual efficiency and managerial opportunism could account for the fair value choice. Particularly, the most significant findings are that size as a proxy of political costs reduces the likelihood of using fair value while market-to-book ratio is negatively associated with the fair value choice. On the other hand, leverage, another typical proxy of contracting costs, seems not to influence the choice. This evidence confirms the current validity of traditional accounting choice theory even if it reveals, in such a context, the irrelevance of the usual relations between accounting choice and leverage.

The Rise of Pension Fund Capitalism in Europe: An Unseen Revolution?

The pension funds have become America's new ‘tycoons’ – surely the most unlikely masters any society ever had. They have attained this position without any struggle, any crisis, any major ‘problems...

Mandatory Fair Value Accounting and Information Asymmetry: Evidence from the European Real Estate Industry

We examine the effects of mandating the provision of fair value information for long-lived tangible assets on firms' information asymmetry. Specifically, we investigate whether European real estate firms' compulsory adoption of International Accounting Standard 40 (IAS 40; Investment Property), which mandated the provision of investment property fair values in 2005, resulted in reduced information asymmetry across market participants. Using as a control group firms that voluntarily provided these fair values prior to the mandatory adoption of IAS 40, we find that mandatory adoption firms exhibit a larger decline in information asymmetry, as reflected in lower bid–ask spreads. However, we also find that mandatory adoption firms continue to have higher information asymmetry than voluntary adoption firms, which appears partially attributable to the lower reliability of fair values reported by the mandatory adoption firms. Together, this evidence adds to the debate on fair value accounting by demonstrating that common adoption of fair value, even for long-lived tangible assets, under a mandatory reporting regime can reduce, but not necessarily eliminate, information asymmetry differences across firms.This paper was accepted by Stefan Reichelstein, accounting.

Real estate portfolio strategy and product innovation in Europe

PurposeThis paper aims to review major changes on real estate markets in Europe and to analyse the impacts of such changes.Design/methodology/approachThe paper provides an overview of the various equity real estate investment vehicles available to investors, with particular focus on the pros and cons of each type of vehicle. The paper also includes an analysis of the impacts of product innovation on real estate markets and on portfolio strategy.FindingsThe changes on real estate markets have led to considerable amounts of capital being allocated to the asset class. Portfolio strategies should be substantially more flexible.Research limitations/implicationsAs many of the new products have been created in bullish real estate markets, it is important to assess the impacts of a market downturn on portfolio performance.Practical implicationsA good understanding of available products with their pros and cons is necessary for a sound investment strategy.Originality/valueThe paper is one of the very few papers that discuss the major institutional changes that have occurred on European real estate markets.

Global Commercial Real Estate

This article explores the role of global commercial real estate in a strategic asset allocation. Global REIT and listed real estate stock indices are used to proxy the broader direct and indirect equity global commercial real estate asset classes. In a historical analysis, using traditional mean-variance optimization the author finds that adding North American real estate dramatically improves the risk and return characteristics of the resulting asset allocations, while the addition of Asian and European real estate offers little improvement. In a set of forward-looking optimization using robust asset allocation tools such as reverse optimization, the Black-Litterman model, and resampled mean-variance optimization, it is observed that global commercial real estate should play a relatively large role in strategic asset allocation moving forward. Other contributions include the development of a working version of the market portfolio that includes global commercial real estate, an analysis of the overlap between popular equity asset class proxies and indirect real estate proxies, and recognition that the popularity of indirect real estate has confused asset allocators. <b>TOPICS:</b>Portfolio management/multi-asset allocation, real estate, risk management

A move toward European retail

Purpose – This report aims to examine the sectoral composition of Europe's real estate investment market, the factors likely to drive a shift in portfolio composition away from the office sector and toward retail, and how this will likely occur.Design/methodology/approach – The article examines the sectoral breakdown of Europe's real estate market and describes the shift in the UK's sectoral breakdown over the past two decades. Economic convergence in Europe, the increasing number of third‐party fund managers offering access to the performance of retail assets, the historically superior risk‐adjusted returns of retail in mainland Europe are noted as factors that will drive the shift. Eight mechanisms that could help achieve the shift are described.Findings – Many investors in European real estate are modifying strategy to capitalise on the expected outperformance of the office sector over the short to medium term. However, as the office rental recovery matures and the potential for outperformance diminish...

Private equity hotel investments

The significance of private equity as a form of financing and investing has led to growing interest in the real estate economy over the past few years. Anglo‐American investors in particular are currently engaged in large‐scale real estate transactions and have now become the most important group of investors in the European hotel real estate market. However, for private equity funds, the high risk of investing in complex tourism and specialized real estate such as hotels is always coupled with an expectation of returns well above the market average. Yet actually achieving above market returns is not always accomplished. This paper therefore deals with the question of why some real estate private equity investors succeed in getting returns above the total market average even in the overall bear Western European market environment while others fail to do so. It shows that one formula for success includes deliberately exploiting market imperfections und overcoming inefficient information policies.