Arnaud Simon

Real Estate Brokers: Do They Inflate Housing Prices? The Case of France

The article discusses a study which investigates the impact of real estate brokers on the price of residential properties sold in 2077 in France. The results show that brokers modify the prices of properties they sell. It stresses that the price impact of brokers varies by the property size and the socio-occupational categories of the buyer. It also suggests that the age, the localization,and the construction period are the main determinants of the decision to use real estate brokers.

Are property derivatives a leading indicator of the real estate market

This paper is the first attempt to analyze the statistical characteristics of changes in property forward prices. Four years and nine months of data on the UK Investment Property Databank (IPD) all property total return swaps during the period 2006 to 2011 are examined. We derive the forward curves using a bootstrap method and study their statistical characteristics. The relationship between forward contracts, the underlying asset, and other assets (risk-free rate, listed real estate) is also explored. The UK IPD All Properties Total Returns index appears significantly less volatile and less efficient in term of correlation than its own derivative contracts. Moreover, changes in forward prices are leading indicators of the IPD index. Regarding the forward price discovery function, investors should collect information not only from the spot market but also--and maybe primarily--from the derivative market. Doing so could well be the better compromise among the various ways of understanding real estate market prices and dynamics.

Stripping of Real Estate-Indexed Swaps and Forward Term Structure: Interest and Computational Method

The recent growth of the real estate indexed derivatives market calls for a greater attention to the pricing of these products. This paper contributes to the literature providing a simple connection between instruments such as year on year zero coupon swap or real estate indexed forwards. A closed-form formula for property swaps based on indexed forwards is established and special attention is paid to the convexity adjustment problem. Finally, we introduce a bootstrap method to compute the implied forward term structure using the swap prices. This simple framework enables market practitioners to obtain valuable information from the derivative market for their investment decisions and their risk management. Indeed, forward prices are generally an advanced indicator of future spot prices.

Cognitive and Emotional Bias in Commercial Property Investment

This article analyses how cognitive and emotional biases affect investor decisions when buying or selling office buildings. To meet this aim, we conducted qualitative research to detect the most important biases. We carried out a total of 26 interviews from across the industry covering investors, fund managers, brokers and valuers. The questions cover three main topics: (1) what triggers the investment decision of buying or not buying an office building; (2) to see who is involved in the investment decision; and (3) to see how practitioners in real estate determine the value of an office building. We transcribed and analysed the interviews. The main results show that (1) some investors and fund managers assume the exit yield of their investment is equal to the initial yield when they estimate the Internal Rate of Return (IRR). Therefore their assumptions are anchored (biased) to acquisition price of the office building. Also (2) the assumptions and scenarios considered by investors and fund managers are framed by the data source they used such as MSCI, PMA or similar data. In addition, (3) their judgments are affected by social influences; the pressure and herding effects from other brokers, valuers and asset managers. Finally, (4) investors and fund managers are willing to take higher risks with the money of the fund than with their own money

Boundary Effects and Repeat-Sales

We study in this article the consequences of the double censoring (right and left) applied on every sample of repeat-sales before calculating a repeat-sales index. We show that, independently of the specificities of each dataset, there exist some intrinsic features for this kind of index that directly depend on the censoring mechanism. Working with the standard deviation of the estimator and the well known bias of the Cass, Shiller model we bring to fore a time structure for these two quantities. Their behaviour is different near the edges of the interval compared to the middle, and this phenomenon is generally more pronounced for the right side than for the left side. A sensitivity analysis is developed using a neutral sample in order to study the way this U-shape evolve in relation with the fundamental parameters. With this analysis we also try to determine the optimal length of the estimation interval, the consequences of the data dispersion and the impact of the liquidity levels in the market (number of goods sold at each date and resale speed).

Arbitrage Models and Mortgage Options Pricing

In this paper we examine the applicability of arbitrage theory to real estate. Arbitrage theory has been applied to the valuation of mortgages using partial differential equations, however the implicit assumptions made are problematic when applied to real estate. The latter is a very complex financial asset, and for instance, for the case of default options, one could produce very large errors (even up to 100%) by applying - unwisely - conventional arbitrage theory techniques. The consequences of real estate appraisal are in this paper studied in particular. Because one has encountered similar problems in real options theory as in real estate, the tools developed in that field could probably well adapt to real estate; we provide here an example. Finally the possibility of pricing contingent claims written on properties is discussed.