nach oben

The Journal of Real Estate Finance and Economics

Erschienen in:

01.01.2009

Commercial Real Estate Valuation: Fundamentals Versus Investor Sentiment

verfasst von: Jim Clayton, David C. Ling, Andy Naranjo

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 1/2009

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

This paper investigates the role of fundamentals and investor sentiment in commercial real estate valuation. In real estate markets, heterogeneous properties trade in illiquid, highly segmented and informationally inefficient local markets. Moreover, the inability to short sell private real estate restricts the ability of sophisticated traders to enter the market and eliminate mispricing. These characteristics would seem to render private real estate markets highly susceptible to sentiment-induced mispricing. Using error correction models to carefully model potential lags in the adjustment process, this paper extends previous work on cap rate dynamics by examining the extent to which fundamentals and investor sentiment help to explain the time-series variation in national-level cap rates. We find evidence that investor sentiment impacts pricing, even after controlling for changes in expected rental growth, equity risk premiums, T-bond yields, and lagged adjustments from long run equilibrium.

Vorheriger Artikel Introduction to JREFE Special Issue on the 2007 MCM International Symposium

Nächster Artikel Office Construction in Singapore and Hong Kong: Testing Real Option Implications

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Hendershott and MacGregor (2005a, b) test whether cap rates, and hence property values, reflect rational projections of future rental growth and expected returns, thereby providing an indirect test of the role of sentiment.

Hirshleifer (2001) and Barberis and Thaler (2003) provide reviews of the extensive behavioral finance literature.

As part of the growing behavioral finance literature, researchers have also begun to carefully explore the impact of “flows” and trading activity on asset prices in public markets. See, for example, Warther (1995), Edelen and Warner (2001), Froot et al. (2001), Brown et al. (2002), Griffin et al. (2007), and Fama and French (2007). Clayton (2003) reviews much of this literature with a focus on the implications for private real estate.

Gompers and Lerner (2000) study the relationship between flow of funds (commitments) into venture capital funds and the valuation of new investments (firms) financed by the venture capital funds. Their findings are consistent with an uninformed demand /sentiment explanation of the link between fund flows and valuations.

NOI is assumed to include a reserve for expected capital expenditures and other nonrecurring expenses, such as leasing commissions.

State and federal income tax effects also affect property values and, therefore, price/NOI multiples, as may the amount and cost of mortgage financing.

Geltner and Mei (1995) and Plazzi et al. (2004) both adapt variants of Campbell and Shiller’s (1998) log-linearized present value model with time-varying discount and “dividend” growth rates to study the relative contributions of time-variation in expected future returns versus property income in property valuation. Both studies conclude that in the short run, property price fluctuations are driven primarily by changes in expected returns and not expected rents.

The specification in Eq. 4 uses the results of Eq. 3 to specify the equilibrium cap rate as a function of the discount rate, r _t, and expected NOI growth, g _t , but does not impose the exact relationship, R _t = r _t − g _t, that holds under the constant growth assumption.

Several stock market studies find institutions to be informed investors; i.e., “smart money.” See, for example, Chakravarty (2001), Jones and Lipson (2004), and Sias et al. (2006). However, this evidence is tempered by studies that suggest institutions do not outperform individual investors (e.g. Nofsinger and Sias 1999, and Kaniel et al. 2005).

Real Estate Report, Summer 2002.

Note that, in theory, cap rate movements are driven by variations in expected net rental income (NOI). We assume that such expectations are highly correlated with expected changes in market rental rates.

The Weighted Symmetric test is often recommended over the Dickey–Fuller test because it is more likely to reject the unit root null hypothesis when it is in fact false. That is, the weighted symmetric test has higher power. We also obtain similar results using the Phillips–Perron test. The Phillips–Perron test is a variant of the Dickey–Fuller test that addresses the problem of additional serial correlation in the residuals.

The NCREIF property index is comprised of the same class of properties and investors as the RERC survey. The quarterly “constant liquidity” version of the NPI is developed in Fisher, Geltner and Pollakowski (2007). The authors recognize that private, relatively illiquid asset markets adjust through both changes in prices and liquidity; observed transaction prices are conditional on overall market liquidity at the time of sale (i.e., price and liquidity are jointly determined). A “constant liquidity value” of a property is the value assuming no change in the level of market transaction activity; all adjustment takes place through price. The difference between the constant liquidity and hedonic value index, based on observed transaction prices that implicitly reflect time variation in liquidity, provides a calibration of commercial property liquidity. The TBI, including its constant liquidity version, are available at the MIT Center for Real Estate website.

Dokko et al. (1999) provide an overview of alternative explanations for real estate cycles that includes the potential role of mortgage flows. Pavlov and Wachter (2006) suggest that the underpricing of the borrowers’ put option in non-recourse commercial mortgage loans is at the root of the link between mortgage flows and property values. Riddiough (2008) argues that the securitization boom of the past 5 years has been accompanied by mispricing mortgage default risk that once again resulted in excessive mortgage flows and a bubble in commercial property prices.

Baker and Stein (2004) develop a theoretical model in which aggregate liquidity acts as an indicator of the relative presence of sentiment-based traders in the market place and therefore the divergence of asset price from fundamental value. Abnormally high aggregate liquidity (high turnover and/or low bid-ask spreads) is evidence of overvaluation and in fact forecasts a downturn in stock prices.

The lagged cap rate change was initially included to expand the dynamic adjustment process. However, it was dropped from the analysis because in no specification was its estimated coefficient statistically significant.

An alternative approach would be to estimate a structural equation system. However, this would require identifying restriction assumptions and would also be problematic given the non-stationary and cointegrated nature of our data.

See, for example, Baker and Stein (2004). Yu and Yuan (2007) also find that irrationality is more prevalent in rising markets.

The version of the CLN sentiment index used here is the principal component of the sentiment proxies after first orthogonalizing each proxy by regressing it on the three economic fundamental variables.

Archer, W. A., & Ling, D. C. (1997). The three dimensions of real estate markets: Linking space, capital, and property markets. Real Estate Finance Fall, 7–14.

Baker, M., & Stein, J. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets 7, 271–299.CrossRef

Baker, & M., Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns. Journal of Finance 61(4), 1645–1680.CrossRef

Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. The Journal of Economic Perspectives 21, 129–151.CrossRef

Barberis, N., Shleifer, A., & Wurgler, J. (2005). Comovement. Journal of Financial Economics 75, 283–317.CrossRef

Barberis, N., & Thaler, R. (2003). Chapter 18: A survey of behavioral finance. In: ConstantinidesG. M., HarrisM., StulzR. (eds) Handbook of the Economics of Finance, pp 1053–1128. vol. 1. Elsevier, Amsterdam.

Brown, G., & Cliff, M. (2004). Investor sentiment and the near term stock market. Journal of Empirical Finance 11, 1–27.CrossRef

Brown, G., & Cliff, M. (2005). Investor sentiment and asset valuation. Journal of Business 78(2), 405–440.CrossRef

Brown, S., Goetzmann, W., Hiraki, T., Shiraishi, N., & Watanabe, M. (2002). Investor sentiment in Japanese and U.S. Daily Mutual Fund Flows. Yale Working Paper.

Campbell, J., Shiller, R. (1998). The dividend-price ratio and expectations of future dividends and discount factors. Review of Financial Studies 1, 195–228.CrossRef

Chakravarty, S. (2001). Stealth-trading: Which trader’s trades move stock prices? Journal of Financial Economics 61, 289–307.CrossRef

Chen, J., Hudson-Wilson, S., & Nordby, H. (2004). Real estate pricing: Spreads and sensibilities: Why real estate pricing is rational. Journal of Real Estate Portfolio Management 10, 1–21.

Chichernea, D., Miller, N., Fisher, J., Sklarz, M., & White, R. (2008). A cross sectional analysis of cap rates by MSA. Journal of Real Estate Research 30(3) (forthcoming).

Clayton, J. (2003). Capital flows and asset values: A review of the literature and exploratory investigation in a real estate context. Homer Hoyt/University of Cincinnati Working Paper.

Clayton, J., MacKinnon, G., & Peng, L. (2008). Time variation of liquidity in the private real estate market: An empirical investigation. Journal of Real Estate Research 30(2) (forthcoming).

De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy 98(4), 703–738.CrossRef

Dokko, Y., Edelstein, R., Lacayo, A., & Lee, D. (1999). Real estate income and value cycles: A model of market dynamics. Journal of Real Estate Research 18(1), 69–96.

Downs, A. (2004). Some aspects of the real estate outlook. Retrieved from http://www.anthonydowns.com.

Edelen, R. M., & Warner, J. B. (2001). Aggregate price effects of institutional trading: A study of mutual fund flow data and market returns. Journal of Financial Economics 59(2), 195–220.CrossRef

Engle, R., & Granger, C. W. J. (1987). Cointegration and error correction: Representation estimation and testing. Econometrica 55, 251–276.CrossRef

Fama, E., & French R. (2007). Disagreement, tastes, and asset prices. Journal of Financial Economics 83(3), 667–689.

Fisher, J., Ling, D. C., & Naranjo, A. (2007). Commercial real estate return cycles: Do capital flows matter? University of Florida/RERI Working 1aper.

Fisher, J., Geltner, D., & Pollakowski H. (2007) A Quarterly Transactions-based Index of Institutional Real Estate Investment Performance and Movements in Supply, and Demand. Journal of Real Estate Finance and Economics 34(1), 5–33.

Froot, K. A., O’Connell, P. G. J., & Seasholes, M. S. (2001). The portfolio flows of international investors. Journal of Financial Economics 59(2), 151–194.CrossRef

Geltner, D. M., Miller, N. G., Clayton, J., & Eicholtz P. (2007). Commercial Real Estate Analysis and Investments, 2nd edn. South-Western Publishing, Cincinnati, OH.

Geltner, D., & Mei J. (1995). The present value model with time-varying discount rates: Implications for commercial property valuation and investment decisions. The Journal of Real Estate Finance and Economics 11(2), 119–135.CrossRef

Gompers, P., & Lerner, J. (2000). Money chasing deals? The impact of fund inflows on private equity valuations. Journal of Financial Economics 5, 281–325.CrossRef

Greene, W. (1993). Econometric analysis, 2nd edn. Prentice Hall, Englewood Cliffs.

Griffin, J., Nardari, F., & Stulz, R., (2007). Do investors trade more when stocks have performed well? Evidence from 46 countries. The Review of Financial Studies 20(3), 905–951.

Hamilton, J. D. (1994). Time series analysis. Princeton University Press, Princeton.

Hendershott, P. H., & MacGregor, B. (2005a). Investor rationality: Evidence from U.K. Property Capitalization Rates. Real Estate Economics 26, 299–322.CrossRef

Hendershott, P. H., & MacGregor, B. (2005b). Investor rationality: An analysis of NCREIF commercial property data. Journal of Real Estate Research 26, 445–475.

Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal of Finance 56, 1533–1597.CrossRef

House, G. C. (2004). Demand for Real Estate: Capital Flows, Motivations, and the Impact of Rising Rates. Institute for Fiduciary Education.

Jones, C. M., & Lipson, M. (2004). Are retail orders different? Working Paper, Columbia University.

Johansen, S. (1988). Statistical Analysis of Cointegrating Vectors. Journal of Economic Dynamics and Control 12, (2–3), 231–254.

Kaniel, R., Saar, G., Titman, S. (2005). Individual investor sentiment and stock returns. Working Paper, Duke University.

Ling, D. C. (2005). A random walk down main street: Can experts predict returns on commercial real estate. Journal of Real Estate Research 27(2), 137–154.

Ling, D. C., & Naranjo A. (2003). The dynamics of REIT capital flows and returns. Real Estate Economics 31, 405–434.CrossRef

Ling, D. C., & Naranjo, A. (2006). Dedicated REIT mutual fund flows and REIT performance. Journal of Real Estate Finance and Economics 32(4), 409–433.CrossRef

McGough, T., & Tsolacos, S. (2001). Do yields reflect property market fundamentals? Working Paper, City University Business School.

Nofsinger, J. R., & Sias, R. W. (1999). Herding and feedback trading by institutional and individual investors. Journal of Finance 59, 2263–2295.CrossRef

Pavlov, A. D., & Wachter, S. M. (2006). Underpriced lending and real estate markets. Retrieved at SSRN from http://ssrn.com/abstract=980298

Plazzi, A., Torous, W. N., & Valkanov, R. (2004). Expected returns and the expected growth in rents of commercial property. Working Paper, The Anderson School at UCLA.

Plazzi, A., Torous, W. N., & Valkanov, R. (2008). The cross-sectional dispersion of commercial real estate returns and rent growth: time variation and economic fluctuations. Real Estate Economics (in press).

Riddiough, T. (2008). On the addictive properties of cheap and easy debt capital. PREA Quarterly, Winter issue, 30–37.

Shilling, J. D. (2003). Is there a risk premium puzzle in real estate? Real Estate Economics 31(4), 501–525.CrossRef

Shilling, J. D., Sing, T. F. (2007). Do institutional real estate investors have rational expectations? Working Paper.

Sias, R., Starks, L. T., & Titman, S. (2006). Changes in institutional ownership and stock returns: Assessment and methodology. Journal of Business 79, 2869–2910.CrossRef

Sivitanidou, R., & Sivitanides, P. (1999). Office capitalization rates: Real estate and capital market influences. Journal of Real Estate Finance and Economics 18(3), 297–322.CrossRef

Sivitanides, P., Southard, J., Torto, R., & Wheaton, W. (2001). The determinants of appraisal-based capitalization rates. MIT Working Paper.

Warther, V. A. (1995). Aggregate mutual fund flows and security returns. Journal of Financial Economics 39, 209–235.CrossRef

Wheaton, W. (1999). Real estate cycles: Some fundamentals. Real Estate Economics 27, 209–230.CrossRef

Yu, J., & Yuan, Y. (2007). Investor sentiment and the mean-variance relation. Working Paper, Wharton School, University of Pennsylvania.

Titel: Commercial Real Estate Valuation: Fundamentals Versus Investor Sentiment
verfasst von: Jim Clayton
David C. Ling
Andy Naranjo
Publikationsdatum: 01.01.2009
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 1/2009
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-008-9130-6

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 1/2009

Optimal Time to Sell in Real Estate Portfolio Management

Introduction to JREFE Special Issue on the 2007 MCM International Symposium

Office Construction in Singapore and Hong Kong: Testing Real Option Implications

Mortgage Put Options and Real Estate Markets