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The Journal of Real Estate Finance and Economics

Erschienen in:

01.11.2013

Transaction Frequency and Commercial Property

verfasst von: Peter Chinloy, William G. Hardin III, Zhonghua Wu

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 4/2013

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Abstract

Metrics using repeat sale data assume that frequently and infrequently sold properties are similar in capital expenditures, maintenance and other characteristics. Value-added investors concentrate on repositioning properties which requires capital investment and managerial skills. Returns using repeat sales likely overstate appreciation by misattributing this investment. Present results show that frequently and infrequently traded properties represent different property populations. The first sale of a repeat transaction sells at a significant discount compared to single sale properties while the second sale transacts at a premium. The results suggest that repeat sale indices may overstate price appreciation and represent returns for a different, relatively small cohort of properties when compared to the large number of properties that transact only once during a specific time period.

Vorheriger Artikel On Indexing Commercial Real Estate Properties and Portfolios

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Physical characteristics alone are not sufficient in estimating value for income producing properties. It is often the case that information related to true property condition, lease structure, lease duration and other characteristics is not available for inclusion in the analysis.

“Value-added” as a real estate investment strategy is mentioned frequently in the business press. Institutional investors and private investors also make this distinction. Also see Shilling and Wurtzebach (2012)

A review of the NCREIF return series for long holding periods shows that the majority of returns over the longest investment horizons are from cash flow returns and not appreciation. REITs are not subject to corporate income tax under certain conditions. One is that no more than 25 % of income can come from capital gains. The result is that REITs are unlikely to target repositioning properties.

It is readily noted that properties held over decades may have substantial variability in capital improvements, maintenance and that tenant mix and profile are also noteworthy. It is very unlikely that tier 1 or Class A properties will not have required capital improvements to compete with additional newer product.

We do not argue that due diligence by buyers is not rigorous, but instead posit that the data typically reported and available to non-transaction participants are limited.

Part of the gross return needs to be allocated to capital costs, leasing costs, etc.… which are associated with the repositioning strategy. The actual return is dependent on leverage, cost to reposition and entrepreneurial profit.

The multifamily property type is purposely selected because the property type has leases that reprice to market frequently and is one of the more transparent property types. Hence, our findings should hold for property types that have more unobservable characteristics.

NCREIF does make adjustment for capital improvements in its appraisal based indices. Nonetheless, the issues addressed in this paper are applicable to commercial repeat sale indices in general.

Gatzlaff and Haurin (1997) offer a corrected residential index based on a censored sample procedure. Meese and Wallace (1997) are among those developing hybrid models that combine both repeat sales and single sales in a hedonic approach.

Annualized gross short run returns during this period peak at 60 % though they decline to virtually zero by 2007. Subsequent data from public sources indicate a staggering decline in value for residential property in Las Vegas.

There are numerous examples of this generic model from the literature including Benjamin et al. (2008), Lambson et al. (2004), and Ling and Petrova (2008).

Chinloy et al. (Price, Place, People and Local Experience. Journal of Real Estate Research, forthcoming. http://aux.zicklin.baruch.cuny.edu/jrer/papers/abstract/forth/accepted/jrer_204(f120302r3).html) argue that classification of buyers as “out-of-town” masks heterogeneity in local buyers. Their results, however, also show that the classification method does not substantially impact hedonic coefficient estimates.

Archer, W. R., Ling, D. C., & Smith, B. C. (2010). Ownership duration in the residential housing market: the influence of structure, tenure, household and neighborhood factors. Journal of Real Estate Finance and Economics, 40, 41–61.CrossRef

Benjamin, J. D., Chinloy, P., Hardin, W. G., III, & Wu, Z. (2008). Clientele effects and condo Conversions. Real Estate Economics, 36, 611–634.CrossRef

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Case, B., Pollakowski, H. O., & Wachter, S. B. (1997). Frequency of transactions and house price modeling. Journal of Real Estate Finance and Economics, 14, 173–187.

Depken, C. A., II, Hollans, H., & Swidler, S. (2009). An empirical analysis of residential property flipping. Journal of Real Estate Finance and Economics, 39, 248–263.CrossRef

Fisher, J., Gatzlaff, D., Geltner, D., & Haurin, D. (2003). Controlling for the impact of liquidity in commercial real estate price indices, Real Estate Economics, 31, 269–303.CrossRef

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, 5–33.CrossRef

Gatzlaff, D., & Haurin, D. (1997). Sample selection bias and repeated-sales index estimation. Journal of Real Estate Finance and Economics, 14, 33–50.CrossRef

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Geltner, D., & Pollakowski, H. (2007). A set of indexes for trading commercial real estate based on the Real Capital Analytics transaction prices database. MIT Center for Real Estate.

Lambson, V. E., McQueen, G. R., & Slade, B. A. (2004). Do out-of-state buyers pay more for real estate? An examination of anchoring-induced bias and search Costs. Real Estate Economics, 32, 85–126.CrossRef

Ling, D. C., & Petrova, M. T. (2008). Avoiding taxes at any cost: the economics of tax-deferred real estate exchanges. Journal of Real Estate Finance and Economics, 36, 367–404.CrossRef

Meese, R., & Wallace, N. (1997). The construction of residential housing price indexes: a comparison of repeat sales, hedonic regression, and hybrid approaches. Journal of Real Estate Finance and Economics, 14, 51–74.CrossRef

Peng, R., Florance, A., Huang, M., Miller, N., & Case, K. (2010). A comprehensive approach to real estate prices. Presented at the 2010 American Real Estate Society conference. http://catcher.sandiego.edu/items/business/CCRSI_Paper_for_Pub_final.pdf

Shilling, J. D., & Wurtzebach, C.H. (2012). Is value-added and opportunistic real estate investing beneficial? If so, why? Journal of Real Estate Research, (34) 429–461.

Turnbull, G., & Sirmans, C. F. (1993). Information, search and house prices. Regional Science and Urban Economics, 23, 545–557.CrossRef

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Titel: Transaction Frequency and Commercial Property
verfasst von: Peter Chinloy
William G. Hardin III
Zhonghua Wu
Publikationsdatum: 01.11.2013
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 4/2013
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-013-9434-z

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