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Commercial Real Estate: Investment Performance

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Loews Philadelphia, Washington A
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Tobias Muhlhofer, University of Miami

There's No Place Like Home: Local Asset Concentration, Information Asymmetries, and Commercial Real Estate Returns

Benjamin Scheick
,
Villanova University
David Ling
,
University of Florida
Andy Naranjo
,
University of Florida

Abstract

Using a large, granular sample of individual commercial property holdings and a unique setting with significant cross-market information asymmetries, we provide robust evidence that local information plays a significant role in asset concentration and return performance. Consistent with the information advantages associated with geographic proximity, we find that property portfolio managers concentrate an economically significant portion of their portfolios in their headquarter location. In particular, managers hold, on average, approximately 20 percent of their portfolios in their home market, while the average portfolio concentration for those not headquartered in that location is approximately 1.4 percent. We also document a significant positive relation between home market concentration and portfolio returns using portfolio sort approaches and cross-sectional regressions. The average monthly return on the high home concentration portfolio exceeds the return of the low home concentration portfolio by 40 basis points. We further exploit cross-sectional heterogeneity in information asymmetry across markets for local and non-local investors to demonstrate that this home market effect is concentrated in geographic markets in which information asymmetry between buyers and sellers is most severe. Finally, using bank loan-level data, we further confirm the identification of the information-based return channel. Overall, our results provide novel evidence on information-based channels of asset concentration and their return effects that are distinct from risk-based explanations.

The Hybrid Nature of Real Estate Trusts

Yildiray Yildrim
,
Baruch College
Thomas Emmerling
,
M&T Bank Corporation
Crocker Liu
,
Cornell University

Abstract

When do real estate trusts exhibit superior performance, when they mimic the underlying real estate or when they behave like stock? We test whether real estate trusts outperform common stock only when it mimics underlying property fundamentals. We also explore what capital market conditions correspond to and/or contribute to when securitized real estate behaves more like underlying property fundamentals. To explore this issue, we examine the investment performance of real estate trusts over the Great Depression and also the Great Recession. A distinguishing feature of our study is that we are the first to analyze the investment performance of real estate trusts (RETs), the predecessor to modern day real estate investment trusts (REITs), which traded over the late 19th and early 20th century. We compare the behavior and performance of RETs to REITs in the process. We find evidence consistent with the notion that securitized real estate exhibits superior performance only when it mimics the direct real estate market. This performance is fueled in part by cheaper borrowing costs, greater availability of debt and equity financing, and loosening credit standards. With the advent of a crisis, securitized real estate exhibits a greater co-movement with common stock. When this occurs, real estate behaves in a similar fashion to common stock and any abnormal performance disappears. This corresponds to tighter lending conditions and higher borrowing costs. We also show that RETs behave in a similar fashion to REITs.

Executive Optimism and Corporate Decision Making: Evidence from Private Asset Transactions

Erkan Yonder
,
Ozyegin University
Piet Eichholtz
,
Maastricht University

Abstract

We investigate almost 4,000 private asset transactions by US REITs and use the exercise of corporate stock options by their CEOs, CFOs and other executive board members to investigate the effect of executive optimism on private-asset deal pricing. Using a two- staged hedonic model, we generate predicted values for all the private asset transactions in the sample, and subsequently compare these predictions with actual purchase prices.
If a REIT led by a strongly optimistic CEO is the buyer in a transaction, we find a price premium of around 5.2 to 6.7 percent, while low investor optimism is associated with purchase price discounts of around 12 percent. For CFO optimism, the effects are more pronounced, especially when the CEO and the CFO are both optimistic. We find that investors who diversify across asset types overpay even more, especially if they are highly optimistic. When the CEO and the CFO have diverse outlooks in terms of optimism, we no longer find significant over- or underpricing.

Nowhere to Run, Nowhere to Hide: Asset Diversification in a Flat World

John Cotter
,
University College Dublin
Stuart Gabriel
,
University of California-Los Angeles
Richard Roll
,
University of California-Los Angeles

Abstract

We present new international diversification indexes across real estate, equity, and sovereign debt. The indexes reveal a marked and near ubiquitous decline in diversification potential across asset classes and markets for the post-2000 period. Analysis of panel data suggests that the decline is related to higher levels of market credit risk and volatility as well as to technology and communications innovation as proxied by internet diffusion. The decline in diversification opportunity is associated with sharply higher levels of investment risk.
Discussant(s)
Veronika Pool
,
Indiana University
Greg MacKinnon
,
Pension Real Estate Association
Jawad Addoum
,
Cornell University
Charles Trzcinka
,
Indiana University
JEL Classifications
  • G1 - General Financial Markets
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location