Commercial Real Estate Investment Research Articles

AR Capital Real Estate Outlook – 2013

The economic stimulus provided by abundant liquidity, low or negative real interest rates, and, in many markets, the rapid and dramatic appreciation of multi -family housing sets the economic backdrop for real estate markets. Against this backdrop, commercial real estate investment markets have fared well, albeit with wide variances by location and property sector type. This paper provides a view on investing opportunities in real estate.

Time to completion liquidity in UK commercial real estate investment: 2000‐2008

PurposeThe purpose of this paper is to provide new insights into asset liquidity in direct commercial real estate investment in the UK. Transaction data provided by four institutional investors of commercial real estate are used to test for changes in asset liquidity as manifest in recorded times from price agreement to deal completion. Median times to completion by stage of the transaction are presented alongside industry estimates.Design/methodology/approachStages of the transaction process are modelled and median times per stage calculated to track changes in asset liquidity over, and between, the two periods of the study (2000‐2002 and 2005‐2008). Real times to completion are considered in conjunction with estimated times compiled through interviews with senior level investment professionals. This paper applies the Wilcoxon rank‐sum test to determine the significance of variation in median times across the two study periods.FindingsThis paper provides empirical evidence that liquidity increased from 2000 to 2008. Median times from price agreement to completion decreased significantly (p=0.015) from 2000‐2002 to 2005‐2008, indicating an increase in asset liquidity in step with an overall increase in transaction volume. Furthermore, senior investment actors were found to persistently over‐estimate transaction efficiency and underestimate liquidity risk when acquiring and disposing of commercial properties.Research limitations/implicationsThis work offers new insights into the changing nature of asset liquidity over the last decade based on a limited number of transactions. Additional studies involving larger samples of transactions would provide still greater insight into commercial real estate liquidity dimensions.Practical implicationsThe paper presents evidence of pro‐cyclicality; asset liquidity varies positively with overall transaction volumes, and investment actors were found to overestimate asset liquidity suggesting a persistent underestimation of liquidity risk.Originality/valueThis paper addresses a gap in the extant literature offering real time on market‐time to completion observations alongside investor estimates. Median times to completion have been modelled and presented, together with time estimates provided by industry experts. Also, for first time in real estate research, median times to completion are shown to shorten significantly in‐line with increasing transaction volumes.

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 Determinants of International Commercial Real Estate Investment

We examine the determinants of international commercial real estate investment using a unique set of panel data series for 47 countries worldwide, covering the period from 2000 to 2009. We explore how different socio-economic, demographic and institutional characteristics affect commercial real estate investment activity by determining both cross-sectional and time-series estimators, running augmented random effect panel regressions. We provide evidence that economic growth, rapid urbanization and compelling demographics attract real estate investment, and also demonstrate that a lack of transparency in the legal framework, administrative burdens of doing real estate business, socio-cultural challenges and political instabilities reduce international real estate allocations.

Broker Use and the Price of Liquidity in Commercial Real Estate Investment: Analysis of Transaction Data for London and New York

As is well established, commercial real estate is a highly specific asset: heterogeneous, indivisible and with less information transparency than most other commonly held investment assets. These attributes negatively affect the liquidity of real estate and encourage the use of intermediaries during asset acquisition and disposal. The cost of intermediation, or brokerage, is the single largest non-tax charge to the investor when acquiring assets. Despite this, there is comparatively little work dedicated to this aspect of the commercial real estate investment market in the extant literature. Furthermore, there are few attempts to explain the use of different brokerage models (with differing costs) in different markets.This study presents a detailed analysis of 9,338 real estate transactions in London and New York City from 2001 to 2011. Data are provided by Real Capital Analytics (RCA) and cover over $450 billion of investments in this period. The paper compares brokerage trends in the two cities and tests whether the decision to transact with broker representation varies with location, investor or asset characteristics. Results indicate greater use of brokerage in London, especially by purchasers, and this persists when data are disaggregated by sector, time or investor type, pointing to the role of local market culture and institutions in shaping brokerage models and transaction costs. Furthermore, within each city, the nature of the investors involved appears to be a more significant influence on broker use than the characteristics of the assets being traded.

Tiptoe Past The Dragon: Replicating and Hedging Chinese Direct Real Estate

Executive Summary. Despite the large volume of foreign direct investments in Chinese commercial real estate markets, there has been little academic research done to analyze and characterize the risk structure of Chinese commercial properties. This paper examines the risk characteristics of direct property investments in Chinese first-tier cities. It applies macro variable models to analyze the risk structure of office properties in Beijing, Shanghai, and Guangzhou. It then tests a selection of instruments that could be used by investors to hedge the risk of investing in these three markets. It concludes with recommendations that could help investors deal with the risk of direct investments in China's property markets.

Tiptoe Past the Dragon: Replicating and Hedging Chinese Direct Real Estate

Over the last 30 years, Chinese commercial real estate markets have joined the global universe of investable assets, as exemplified by vibrant skylines and the construction of startling new buildings in megacities such as Beijing and Shanghai. However, international investors who are often mesmerized by the Chinese economy’s historical growth and potential size might not have a clear understanding of the nature of the risk they face in China. Notwithstanding the focus on operational and legal risks whose need was emphasized by some highly publicized cases of international investors being caught in the complex system of Chinese guanxi, international investors venturing into the Chinese direct property markets are faced with many macro risks that have to be addressed. Surprisingly, despite the large volume of foreign direct investments in Chinese commercial real estate markets in recent years, there has been little academic research done to analyze and characterize the risk structure of Chinese commercial properties. Using a database never applied before in academic literature, this paper fills in the gap by studying the risk characteristics of direct property investments in Chinese first-tier cities. It applies macro-variable models to analyze the risk structure of office properties in Beijing, Shanghai, and Guangzhou. It then tests a selection of instruments that could be used by international investors to hedge the risk of investing in these three sub-markets. It concludes by making a series of recommendations that could help international investors deal with the risk of direct investments in China’s property markets.

Time-varying correlation between stock market returns and real estate returns

Direct investment in commercial or residential real estate is found to provide valuable diversification benefits for Australian investors though this is not so evident for indirect real estate investment vehicles like listed Australian real estate investment trusts (A-REIT). Further, multivariate analysis of Australian real estate and share market quarterly returns, spanning the period from the 3rd quarter 1986 to the 3rd quarter 2009, suggest that the correlation between real estate returns and share market returns is time-varying. Finally, while all of the asset class correlation coefficients increased with the Global Financial Crisis period this broad movement in asset class correlation is not evident in during the Wall Street Crash of 1987.

Mezzanine Finance and Preferred Equity Investment in Commercial Real Estate: Security, Collateral & Control

This article will review both the genesis and the rise in popularity of preferred equity and mezzanine debt, examine their legal and structural differences, and provide some exposition as to how these financing techniques work from security, collateral and control standpoints. We do not undertake in this article to address the differences in tax and accounting treatment between mezzanine loans and preferred equity investments both for either the mezzanine lender or preferred equity investor on the one hand, or for the mezzanine borrower or the common equity investor, on the other hand. In deciding upon which structure to use, transaction participants should consult with their independent tax and accounting advisors to ensure that the transaction is appropriately structured to best meet their individual needs, subject to such compromise as may be necessary to effect a desired transaction. We proceed as follows: Section II outlines the legal principles of, and the practical realities that have shaped, real estate finance from common law to modernity. Section III begins with an exposition of the preferred equity instruments and mezzanine debt that form the subject of this study. It will start by outlining their qualities and follow with a delineation of the organizational structures used in deals in which they form part of the capital structure. Lastly, it will proceed through theoretical and practical issues for legal counsel to consider. Section IV will address an open issue, never, to the authors’ knowledge, having been before a court: whether these funding mechanisms should be treated as equitable mortgages according to the common law equitable tradition to treat mortgage-like agreements as mortgages. This Section will argue that these funding mechanisms should not be treated as equitable mortgages. Finally, we will set forth our conclusion in Section V.

Understanding Commercial Real Estate Indices

This paper examines five indices in the commercial real estate (CRE) markets: the National Association of Real Estate Investment Trusts (NAREIT) Index, the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI), the Transaction Based Index (TBI), Moody’s/Real Commercial Property Price Indices (CPPI), and CoStar Commercial Repeat-Sale Indices (CCRSI). We find much heterogeneity in the information content of these indices. NAREIT, NPI, and TBI may not be appropriate measures of current CRE market conditions in general, even though these indices, and especially the first two, are commonly used. We find substantial information differences between CPPI (an index driven by high-value CRE properties) and CCRSI (an index driven by low-value CRE properties) and the difference in information content is notable. This finding indicates that high- and low-value CRE markets are not closely linked. As most CRE indices are driven by high-value CRE markets, our findings suggest that most of these indices may not be very useful to non-institutional CRE investors, local banks who are the main lenders of such loans, or investors in CMBS where the underlying assets include low-value CREs. Finally, based on either CCRSI or CCPI, we conclude that CRE markets are local.

Private and Public Real Estate: What Is the Link?

Equity investments in commercial real estate are made through private transactions or public markets. Private and public investments include core real estate—the passive management of existing income generating properties—as well as value-added and opportunistic investments that focus on the active development of existing and new properties. Both forms of investment provide exposure to the same property market. Yet by conventional measures, public and private investments offer surprisingly different return and risk profiles. In this article, the authors focus on equity investment in core real estate in the U.K. market, analyzing data spanning more than two decades. They demonstrate a strong link between the returns to public and private real estate by correcting for appraisal smoothing and for the lead–lag relationship between public and private returns. They also discuss how real estate risk changes over longer horizons. In particular, the correlation between private and public returns strengthens as the investment horizon increases. These results have important implications for both risk management and asset allocation. As an example, they illustrate how the diversification benefits of real estate depend on the investment horizon and the amount of leverage employed.

Déjà Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around

In this study, we analyze why commercial banks failed during the recent financial crisis. We find that traditional proxies for the CAMELS components, as well as measures of commercial real estate investments, do an excellent job in explaining the failures of banks that were closed during 2009, just as they did in the previous banking crisis of 1985 – 1992. Surprisingly, we do not find that residential mortgage-backed securities played a significant role in determining which banks failed and which banks survived.

The Determinants of International Commercial Real Estate Investment

We examine the determinants of international commercial real estate investment using a unique set of panel data series for 47 countries worldwide, covering the period from 2000 to 2009. We explore how different socio-economic, demographic and institutional characteristics affect commercial real estate investment activity by determining both cross-sectional and time-series estimators, running augmented random effect panel regressions. We provide evidence that economic growth, rapid urbanization and compelling demographics attract real estate investment, and also demonstrate that a lack of transparency in the legal framework, administrative burdens of doing real estate business, socio-cultural challenges and political instabilities reduce international real estate allocations.

Real Estate in a Mixed‐Asset Portfolio: The Role of the Investment Horizon

In this article, three oft‐mentioned special characteristics of the real estate asset market—high transaction costs, marketing period risk and return predictability—are addressed in analyzing the role of U.K. commercial real estate investments in a mixed‐asset portfolio. Due to favorable horizon effects in risk and return, the allocation to real estate in a portfolio with stocks, bonds and cash increases strongly with the investment horizon. Examining the relative importance of return predictability, transaction costs and marketing period risk for the optimal allocation to real estate, the article finds that the consideration of return predictability is very important, except for short‐term horizons. Accounting for transaction costs is crucial for short‐ and medium‐term investors. Marketing period risk appears to be negligible. Traditional mean‐variance analysis—that is, ignoring return predictability, transaction costs and marketing period risk—can be very misleading.

Annette Miae Kim. Learning to Be Capitalists: Entrepreneurs in Vietnam’s Transition Economy. New York: Oxford University Press, 2008. Pp. x+212. $35.00 (cloth).

Previous articleNext article No AccessBook ReviewAnnette Miae Kim. Learning to Be Capitalists: Entrepreneurs in Vietnam’s Transition Economy. New York: Oxford University Press, 2008. Pp. x+212. $35.00 (cloth).John RandJohn RandUniversity of Copenhagen Search for more articles by this author University of CopenhagenPDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Economic Development and Cultural Change Volume 59, Number 3April 2011 Article DOIhttps://doi.org/10.1086/658352 Views: 10Total views on this site Citations: 1Citations are reported from Crossref © 2011 by The University of Chicago. All rights reserved.For permission to reuse, please contact [email protected]PDF download Crossref reports the following articles citing this article:Thanh Bao Nguyen, Erwin van der Krabben, D. Ary A. Samsura Commercial real estate investment in Ho Chi Minh City – A level playing field for foreign and domestic investors?, Habitat International 44 (Oct 2014): 412–421.https://doi.org/10.1016/j.habitatint.2014.08.002

The Walkability Premium in Commercial Real Estate Investments

This article examines the effects of walkability on property values and investment returns. Walkability is the degree to which an area within walking distance of a property encourages walking for recreational or functional purposes. We use data from the National Council of Real Estate Investment Fiduciaries and Walk Score to examine the effects of walkability on the market value and investment returns of more than 4,200 office, apartment, retail and industrial properties from 2001 to 2008 in the United States. We found that, all else being equal, the benefits of greater walkability were capitalized into higher office, retail and apartment values. We found no effect on industrial properties. On a 100‐point scale, a 10‐point increase in walkability increased values by 1–9%, depending on property type. We also found that walkability was associated with lower cap rates and higher incomes, suggesting it has been favored in both the capital asset and building space markets. Walkability had no significant effect on historical total investment returns. All walkable property types have the potential to generate returns as good as or better than less walkable properties, as long as they are priced correctly. Developers should be willing to develop more walkable properties as long as any additional cost for more walkable locations and related development expenses do not exhaust the walkability premium.

Do REITs Have an Advantage When Credit is Tight?

Executive Summary. Real estate investment trusts(REITs) have access to capital sources that other realestate investors do not: public markets for equity anddebt. Access to capital may give REITs an advantageover other commercial real estate investors when creditis tight. This paper examines whether markets perceivethis to be true and show that REITs' premia to net assetvalue (NAV) increase when credit is tight. Thus, it appearsthat the markets do see REITs as having an advantagewhen credit is tight, although there is a lag betweencredit tightening and markets reacting. In Japan,where J-REITs are far more passive than in the UnitedStates, the relationship between credit conditions andREIT premia to NAV is exactly the opposite.

The Attractiveness of 66 Countries for Institutional Real Estate Investments: A Composite Index Approach

We address the attractiveness of worldwide 66 countries for institutional real estate investments by the construction of a composite index. For the index' composition, we refer to the results of prior research on the parameters determining real estate investment activity on an aggregated country level. Our index reveals a country ranking that correlates reasonably with commercial real estate investments as we prove with back-tests over six years. We increase the transparency of market variables for decision-making in global real estate asset allocation and provide the key determinants that shape national real estate markets. The results highlight the strengths and weaknesses of developed, transition and emerging economies and provide guidelines for political improvements to attract international capital to spur real estate investment activity.

The Attractiveness of 66 Countries for Institutional Real Estate Investments

Executive Summary. This paper uses a composite indexto examine the attractiveness of 66 countries worldwidefor institutional real estate investments. The indexconstruction is based on the parameters found in priorresearch that determine real estate investment activity onan aggregated country level. The index reveals a countryranking that correlates reasonably with commercial realestate investments, as proven by back-tests over six years.The findings increase the transparency of market variablesfor decision-making in global real estate asset allocationand provide the key determinants that shape realestate markets within countries. The results also highlightthe strengths and weaknesses of developed, emerging,and challenged economies.

Why Is Employment Growth So Low?

Anemic investment in residential and commercial real estate has been a significant factor contributing to slow growth in employment.