Real Estate Risk Research Articles

Real estate as a common risk factor in the financial sector: International evidence

This article analyzes the role real estate risks in the pricing of Financial sector stocks for a sample of 14 countries. Real estate risk measures are drawn from the FTSE/EPRA NAREIT indexes. We also develop a specific US real estate risk premium. The period covered runs from February 2000 to December 2015. GMM estimates of parsimonious multifactor models reveal statistically significant domestic and US real estate risks in the financial sector.

Understanding underwriting: A look inside commercial real estate insurance — breaking down the driving differentiators behind property insurance pricing

For real estate owners and operators, the cost of commercial property insurance is a key economic driver, but each individual asset has its own set of risks and, as a result, pricing. What are the differentiators used by underwriters to price out a premium? What should owners/operators be looking for when purchasing a new property or building a business continuity plan (BCP)? This paper navigates the complicated world of commercial real estate risk.

Evolution of Real Estate Derivatives and Their Pricing

Real estate derivatives have the potential to stabilize one of the most influential risks present in economies worldwide—real estate risk. Commercial and residential real estate represent a very large proportion of wealth in developed economies. In this article, the authors revisit the evolution of these instruments and describe the state of the art in modeling how they should be priced. The property derivatives market is still underdeveloped by comparison with its corresponding cash market, one main reason commonly cited being the lack of flexible and robust theoretical approaches that can be easily applied in practice. In recent years, several models have been proposed for pricing real estate derivatives, and this article reviews the most important ones. In addition, the authors highlight a discrete-time model that can be easily set up and applied for pricing real estate derivatives employing Monte Carlo simulation. It is reasonable to expect that the expanding literature on real estate derivatives valuation will provide the framework needed for this market to grow.

International listed real estate returns: evidence from the global financial crisis

PurposeThe purpose of this paper is to analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global Financial Crisis, in presence of errors-in-variables (EIV) and illiquidity (measured by serial correlation, following Getmansky et al. (2004)).Design/methodology/approachThe authors extend the seminal work of Bond et al. (2003), and shed a new light on the relative performance of listed real estate before and after the GFC. First, the authors suggest the use of various asset pricing models (APM) including the Fama and French (2015) five-factor APM with global and country-level factors. Second, the authors implement unbiased estimators to correct for the econometric bias induced by EIV in APM. Third, the authors deal with the impact of illiquidity (measured by serial correlation) on the risk properties of international securitized real estate returns.FindingsThe findings show that post-GFC, a radical change in international listed real estate risk factors has resulted in more homogeneous markets internationally and less diversification opportunities for international investors.Practical implicationsThe authors suggest the use of robust linear APM (including the Fama and French (2015) five-factor APM) to analyze the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015.Originality/valueThe authors analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global Financial Crisis.

Financing Risk of Real Estate Enterprises and Its Prevention and Control Measures

Real estate industry has become the pillar industry of the national economy. It needs huge financial support because of its high relevance and high value. At present, the development of real estate financial market in China is slow, which will endanger the sustainable and healthy development of real estate enterprises. Only by effective financing can we improve the market competitiveness of real estate enterprises. This paper expounds the types of financial risks in real estate, analyses the current situation of financing risks in real estate enterprises, and puts forward effective countermeasures to prevent and control financial risks in real estate enterprises.

Asset-light strategy and real estate risk of lodging C−corps and REITs

The asset-light strategy has been gaining popularity among practitioners for its virtues in lowering capital investment burden and allowing efficient expansion. Meanwhile, arguably the greatest advantage of the strategy—a mitigating effect on the real estate risk exposure—has yet to be validated. To empirically test this effect, this study adopts a comparative approach, utilizing data on both lodging C-corporations and real estate investment trusts (REITs). Yearly firm-level real estate betas are estimated through an augmented Fama-French asset-pricing model for all lodging firms and REITs between the years 2002–2016, and further used for a second-stage analysis on their relationship with real estate ownership and liquidity. Findings reveal that 1) lodging firms are significantly less exposed to real estate risk than REITs, 2) lodging firms may still be conditionally exposed to real estate risk under liquidity constraints, and 3) certain unique characteristics of REITs render differences in the effects of liquidity.

Real estate as a common risk factor in bank stock returns

Abstract This article investigates the potential role of real estate risk in the pricing of US bank stocks from February 1990 to December 2015. Generalized method of moments estimates of conditional multifactor models are provided. The real estate risk is proxied by the return of an investment strategy that is short on low-leverage real estate investment trust (REIT) assets and long on high-leverage REIT assets. We group banks into portfolios based on their market capitalization, real estate loans as a proportion of total assets, and book-to-market ratios. The results suggest that the real estate premium is a relevant risk factor in bank stocks returns. For instance, we find that a 100-basis-point increase to the real estate premium increases returns by 15.8 to 20.1 basis points for portfolios grouped by market capitalization. This conclusion remains when other oft-cited bank risk factors are considered, including small-minus-big, high-minus-low and the return on equity of the financial sector.

Advancing real estate decision making: understanding known, unknown and unknowable risks

PurposeWhilst existing literature on real estate risk management focusses almost exclusively on holistic risk management techniques, documented increases in frequency and magnitude of unforeseen, rare and extreme events can throw up sudden, unexpected shocks that can challenge recognised real estate decision-making strategies. The paper aims to discuss this issue.Design/methodology/approachTo advance real estate decision-making practice in this area, this research paper takes the skilfully conceptualised downside risk framework presented by Diebold et al. (2010), being the known (K), the unknown (u) and the unknowable (U) risk categories, to provide a blueprint for effective real estate decision making in a changing global environment.FindingsIn recording categories of risk, managing uncertainty can be achieved by an interrelated approach of adaption, robustness and resilience. This is important part of a real estate manager’s decision-making toolkit as risk recognition and knowledge of KuU event categories can augment an effective management strategy.Originality/valueThe mastery of modern real estate risk management can be better served by understanding and managing extreme downside risk events. Creating a comprehensive risk management framework can enhance comparative real estate performance whereby unprepared competitors fail in a world increasingly affected by large, highly improbable and unpredictable events.

Securitized and Direct Real Estate Factors in the Pricing of US Bank Stocks

AbstractThis article analyzes the role of securitized and direct real estate risks in the pricing of US bank stocks. Real estate risk measures are drawn from the National Association of Real Estate Investment Trusts (NAREIT) and NCREIF indexes. Beside the real estate, the other risk exposures considered are the market, the term, and the default premiums. The period covered runs from February 1990 to December 2015. GMM estimates of conditional multifactor models report considerable evidence in favor of real estate risk in US bank stocks.

Real Estate Economics, Management and Investments: New Perspectives and Frontiers

New perspectives and frontiers were highlighted in a Special Issue on “Real Estate Economics, Finance and Investments”. The twenty-eight papers that were selected and published emanated from scholars from universities all over the world with the aim to represent more recent advances in building management, mass appraisal methods, real estate risk management, economic evaluation of real estate investment projects, real estate market, property, social housing, real estate economics, real estate finance, building transformation and economic effects on environment. These papers helped to determine a unique and valuable opportunity to experiment with multiple approaches to these ever more crucial topics. This note proposes a brief review of the twenty-eight papers, concluding with some reflections about policy, practice and research on real estate issues.

Do commodities effectively hedge real estate risk? A multi-scale asymmetric DCC approach

We examine the hedging performance of commodities futures for US real estate portfolios in a multi-scale setting. Dynamic asymmetric conditional correlations and thereafter optimal hedge ratios of real estate stock returns with commodities index, gold, oil and bond returns are estimated to examine hedge effectiveness under heterogeneous market expectations. Rolling window based out-of-sample one-step-ahead forecasts show that commodities index (gold) provide the best hedge to US real estate stocks for short-term (long-term) investments. The results are robust to the choice of model refits and rolling window sizes and provide useful implications for alternate markets’ investors.

International money supply and real estate risk premium: The case of the London office market

The main purpose of this study is to deeply investigate the determinants of the risk premium for the Central London market between Q2-2002 and Q3-2015 using a vector autoregression (VAR) model. We shed new light on the role of central banks in the historical level of the commercial real estate risk premium. Indeed, since the global financial crisis (GFC), central banks have used unconventional monetary policies, increasing the quantity of money available in the economy and creating structural changes. Therefore, we have described the link between monetary policies and real estate using a theoretical IS/LM Mundell-Fleming framework for a small open economy with a flexible exchange rate. To empirically explore this phenomenon, we have constructed a monetary index adapted to the office market. We find that throughout the whole period (2002–2015), the vacancy rate, the employment in services, the FTSE 100, the new monetary index and the autoregressive parameter are the main determinants of the historical risk premium. However, this result hides the complex realities of different sub-periods. Finally, we study the structural changes introduced by the monetary policy using a structural VAR model and impulse-response function.

Real Estate Risk Analysis: The Case of Caserma Garibaldi in Milan

The global economic crisis and deep financialization processes recently suffered by the real estate market have exposed the latter to further and greater risks. Against this, the importance of real estate risk management has noticeably grown within the dynamics of both markets, real estate and finance. Therefore, the aim of this paper is to develop a comprehensive tool for the risk rating that will consider both the systematic and idiosyncratic risks possibly incurred during a real estate operation, in order to deliver their actual magnitude. It will be composed of 33 criteria whose weights are determined through the application of an analytic hierarchic process on a panel of market operators. This tool is primarily addressed to investors since it allows making strategic decisions while being supported by an analytical procedure that also ensures transparency of the conduct for the rating. An application of the presented tool within the decision-making procedure of the re-functionalization of a former barracks in Milan’s city center is then described; this case study will also constitute an opportunity to highlight the strong relationship that occurs between the profitability of an operation and the risk incurred.

Do Different Price Points Exhibit Different Investment Risk and Return in Commercial Real Estate?

Conventional real estate price indexes provide a single measure for the path of asset prices over time (controlling for the quality of the representative or average property). Properties could, however, have different price dynamics based on the price segment in which they are traded. On the demand side, investors at different price points are differentiated by the amount of capital they have at their disposal and the type and source of financing. Smaller, private investors cluster at lower price points, whereas large institutions dominate the high price points. On the supply side, properties at different price points may serve different space markets with different types of tenants and may reflect different supply elasticity and land/structure value ratios. In this article, the authors use an unconventional approach, quantile regression, to estimate price indexes for different price segments in commercial real estate. Their results show that there are indeed large differences in price dynamics for different price points. These differences are suggestive of a lack of integration in the property asset market because the authors find apparent differences in the risk–return relationship. Lower-price-point properties exhibit less risk (in the form of volatility and cycle amplitude) but have no evidence of lower total returns. Lower-price-point properties also show greater momentum and thus greater predictability.

Real Estate Risk, Corporate Investment and Financing Choice

This paper empirically examines how real estate risk impacts corporate investment and financing decisions. Using a panel of United States firms from 1985 to 2013, we document that real estate risk is negatively associated with firms’ long-term investments and long-term external financing in equity and debt. The results are robust to different risk measurements and in particular salient during the financial crisis period when the endogeneity between risk and investment is less of a concern. The effect on firm leverage, however, depends on risk measures. Overall, in contrast to previously documented positive effects of the real estate value, real estate risk exposure exhibits mostly the opposite effects on investment, financing and capital structure. This difference is consistent with option value determinants. Findings in this paper shed new lights on the impact of real estate holding on corporate decisions, offer a new explanation for the underperformance of hedge funds’ real estate strategies, and confirm the theoretical predictions in Deng et al. (2015).

Concepts and philosophy of risk management in real estate industry

This paper presents concepts and philosophy of risk management in the context of real estate development industry. The paper includes an in-depth review of literature for defining real estate development and risk within the existing knowledge pool. The population of this study comprises real estate developments across India and covers three qualitative case examples relating to a single residential family house, commercial three-story office building, and apartment building for identifying elements of work breakdown structure (WBS). Further, these WBS elements are considered grouped into four phases of real estate project management to strategise risk management. The conceptual framework on precepts of risk management has been used for mapping some propositions relating to the real estate development. This paper implies a need for an efficient system of risk management in the real estate practices. This paper contributes to the theoretical foundation for identifying, assessing and analysing risks in the real estate development industry.

Рыночный риск на рынке недвижимости России и финансовые инновации

The article underlines the latest trends in real estate prices in Russia, which helps to record the increasing negative effect of real estate risks on various groups of economic agents. The consequences of negative dynamics in mean real estate market prices could be relaxed by real estate derivatives market construction, which has been unclaimed yet by the market participants due to favorable economic conditions. The article provides the ground for the necessity of real estate risk hedging for various groups of economic agents, viability of real estate derivatives utilization for the purposes of hedging and their application to further financial innovations.

Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy

From a broad macro-financial structure perspective, credit conditions have gaven rise to house price booms and busts in several advanced economies (e.g., Ireland, Spain, and the U.S.), and, more specifically in the U.S., an underpricing of risk made possible by regulatory arbitrage and shadow financing fueled the credit and twin real estate bubbles of the mid- 2000s. Across countries and over time, bubbles have been particularly acute in real estate markets reflecting not only the relatively inelastic supply of land and thin trading of real estate, but also the amplification of shocks via backward-looking price expectations and the funding of consumption off of distorted and elevated prices. Macro-prudential lessons from the Great Crisis highlight the need to prevent the build-up of excess real estate financing and limit the amplification and correlation of real estate risks. Progress has been made through imposing new tougher restrictions on the choice sets of lenders and of borrowers, with particulars varying across advanced economies. Nonetheless, regulatory reform of banking is ongoing, significant challenges remain especially in dealing with correlated risks associated with securitization.

The Role of Real Estate Derivatives in Hedging Real Estate: An Empirical Analysis of the U.S. Commercial Market

Today, real estate today is used as an important investment vehicle owing to its many benefits, including diversification and ability to yield real returns. Real estate prices can be volatile in the short run, and therefore, investors need to hedge themselves to avoid negative returns. This problem is due to the systematic and unsystematic components of real estate risk. Systematic risk refers to risk that applies to all similar properties, while unsystematic risk refers to risk that applies only to the property that needs to be hedged. The systematic component of real estate risk can be mitigated by proper use of real estate derivatives, such as forwards, futures, options and swaps. These are instruments whose underlying asset is the index, which is composed of real estate in the region with a similar purpose as the property being hedged. This study examines some of the major benefits and difficulties of using real estate derivatives for hedging real estate, using data from the U.S. commercial real estate market, such as those from Ishares U.S. Real Estate Exchange Traded Fund, General Growth Properties Inc., Simon Property Group Inc., The Macerich Company, and Vornado Realty Trust. The daily data are from the period June 19, 2000 and August 24, 2015, with 3,820 pieces of information for each variable. The study aims to investigate the statistical integration in the U.S. commercial real estate market, using Johansen’s cointegration test. The research helps provide a better understanding of the real estate derivatives market and has important implications for academicians, practitioners, and policy makers.

Humanizing Finance by Hedging Property Values

The recent financial crisis triggered the greatest recession since the 1930s and had a devastating impact on households’ wealth and on their capacity to reduce their indebtedness. In the aftermath, it became clear that there is significant room for improvement in property risk management. While there has been innovation in the management of corporate finance risk, real estate has lagged behind. Now is the time to expand the range of tools available for hedging households’ risks and, thus, to advance the democratization of finance. Property equity represents the major asset in households’ portfolios in developed and undeveloped countries. The present paper analyzes a set of potential innovations in real estate risk management, such as price level-adjusted mortgages, property derivatives, and home equity value insurance. Financial institutions, households, and governments should work together to improve the performance of the financial instruments available and, thus, to help mitigate the worst impacts of economic cycles.