J. Sa-Aadu

The Role of Real Estate in an Institutional Investor's Portfolio Revisited

Many papers have recently pointed out that institutional investors allocate only a very small fraction of their portfolio to real estate, much smaller than theory would dictate. This raises the question, are institutional investors underinvested in real estate equities? Or do we simply have the wrong priors? This paper is an attempt to provide some new insights into this asset allocation paradox. The key conclusions of the paper are several: First, unlike other assets, it would appear that real estate, and real estate diversification, pays off at the very time when the benefits are most needed, that is, when consumption growth opportunities are low. Second, real estate returns are predictable. In fact, the amount of predictability in real estate returns appears to be about the same as in stock returns. Third, real estate performs well in an asset-liability framework. Fourth, the chance of experiencing a large loss on real estate over a long horizon is quite small. We also report here that private sector commercial real estate investments represent between 6 and 12 percent of investable wealth in the United States. Thus, it follows (if one believes the capital asset pricing model) that if institutional investors were to invest more in real estate (up to 12 percent of their assets), they should be able to eliminate nonmarket or unique risk. All of this leaves us a bit dumbfounded as to why institutional investors hold only between 2 and 3 percent of their assets in real estate.

What Have African Housing Policies Wrought

This paper is a review of contemporary African housing markets, particularly the consequences of current housing policies. Overall, we conclude that the resource allocation which results from the current housing policies are quite contrary to their intended objectives. Many of the policies are suspect, both in terms of underlying economic rational and realistic economic achievement. In many respects, these policies have discouraged housing investment, and have been both inequitable and distortional. In rethinking these policies, our prescription is that since the private sector has efficiently provided the majority of the housing in the past, African governments must disengage themselves from direct production of housing. They must deregulate the housing markets and provide the right incentives, so as to realign the risks and rewards of investment in housing and permit private production to flourish.

On the Portfolio Properties of Real Estate in Good Times and Bad Times

Motivated by the theoretical results on strategic asset allocation, we examine the gains in portfolio performance when investors diversify into different asset classes, with particular focus on the timeliness of such gains. Although the various asset classes we analyze yield significant gains in portfolio performance, even in the presence of short-sales constraints, the timeliness of the gains differs considerably across the asset classes. Our key result is that real estate and commodities and precious metals are the two asset classes that deliver portfolio gains when consumption growth is low and/or volatile, that is, when investors really care for such benefits. Our analysis highlights an important metric by which to judge the attractiveness of an asset class in a portfolio context, namely the timeliness of the gains in portfolio performance. Further, our results on the performance of real estate in both good times and bad times suggest that the typical institutional allocation to real estate may underweight the role of the asset class in a diversified portfolio context.

Influence of Rent Differentials on the Choice between Office Rent Contracts with and without Relocation Provisions

In this paper we concern ourselves empirically with the influence of rent differentials on the choice between rent contracts with and without relocation provisions investigating the effects of relocation provisions on office rents. The study departs from the extant literature by using a switching simultaneous-equations model to estimate hedonic rent functions for alternative office lease contracts with choices of relocation provisions. The empirical results suggest that price considerations and certain lease terms are important determinants of the choice of office relocation rights. The results also suggest that certain tenant characteristics, like tenant size and creditworthiness, have only a marginal effect on the choice of relocation rights. Copyright American Real Estate and Urban Economics Association.

A Test of Integration and Cointegration of Commercial Mortgage Rates

Little empirical work examines the extent to which commercial mortgage markets are integrated into broader capital markets. We use time series data on commercial mortgage yields and yields on comparable-maturity Treasury securities to identify a long-run cointegrating relationship between the two yield series. Our empirical evidence suggest that, while the yield on commercial mortgage is cointegrated with that on comparable-maturity Treasury securities, the cointegrating relationship is far less than that found between the yield on residential mortgage rates and that on comparable-maturity Treasury securities during 1980–1990 time period. However, our results also show that the spate of commercial mortgage securitization that began in early 1991 may have been a market-integrating force and caused the commercial mortgage market to become more integrated into broader capital markets. Indeed, our results suggest that changes in capital market rates are now much more rapidly reflected in commercial mortgage rates than in the 1980–1990 time period, although there is a lag.

Teaser Rates in Conventional Adjustable-Rate Mortgage (ARM) Markets

This article examines the pricing of teaser rates on adjustable-rate mortgages (ARMs). The theory indicates that lenders may offset teaser rates on ARMs through an increase in upfront fees or points, through looser life of loan rate caps, or through higher contract rates after the teaser has expired. Cross-sectional regression results fail to reject the null hypothesis that teaser ARMs are correctly priced.

Choosing between fixed-and adjustable-rate mortgages: The case of commercial mortgages

This article reports on the determinants of the ARM choice for commercial real estate projects. The theoretical literature suggests that commercial real estate projects are more likely to be financed with an adjustable-rate mortgage (ARM) if the projects income stream or value is expected to rise with inflation over time. The empirical model estimated is a structural probit probability model of the ARM choice. Our results demonstrate that commercial borrowers typically place great emphasis on relative interest-rate differentials when deciding which mortgage is best. We also find that commercial mortgage borrowers will ordinarily be reluctant to issue an ARM when the fixed interest rate is low.

Market Liquidity, Funding Liquidity, and Hedge Fund Performance

This paper provides evidence on the interaction between hedge funds’ performance and their market liquidity risk and funding liquidity risk. We demonstrate that funding liquidity risk is an important determinant of hedge fund performance. Hedge funds with high loadings on the funding liquidity factor underperform low-loading funds by about 2.47% (11.67%) annually in the high (low) liquidity regime, during 1994-2012; with liquidity regimes identified using a 2-state Markov regime switching model. We further confirm that market liquidity and funding liquidity interact with each other, potentially leading to negative liquidity spirals. These results provide support for the Brunnermeier-Pedersen model that rationalizes the link between market liquidity and funding liquidity. We also document that hedge fund managers are not entirely successful in timing shifts in market liquidity, and lockup provisions are only effective during high liquidity states.

Unconventional Monetary Policy and U.S. Housing Markets Dynamics

This study investigates whether the unprecedented liquidity injected in the economy by the U.S Fed through unconventional monetary policy measure, popularly known as quantitative easing (QE), is a systematic factor that can explain the abnormally low U.S. housing starts of recent years. We use housing and mortgage markets data that should capture the liquidity induced by QE to construct four unobservable aggregate liquidity factors as key channels through which QE stimulus effects might have been transmitted to housing and mortgage markets. Using monthly MSA level data, we find that expected housing starts are related across time to fluctuations in the aggregate liquidity factors. Specifically, we find that housing starts liquidity betas, their sensitivities to liquidity shocks from QE transmitted through the aggregate liquidity factors significantly influence the level of U.S. investments in new single family housing between 2005 and 2012. However, we find evidence of heterogeneity in the responsiveness of housing starts to innovations in the aggregate liquidity factors in that market regimes with high levels of land use control (constrained markets) exhibit relatively muted sensitivities to fluctuations in the aggregate liquidity factors induced by QE. Remarkably, we also find that in the absence of GSE and FHA capital market activities that channel credit into housing market the contraction in housing starts would have been worse. Further, a build-up in single family homes-for-rent, shadow vacancy liquidity risk, exerts a down-ward pressure on investments in new single family housing.

Houses, Banks, and Financial Markets: Why the Crisis this Time?

The current global economic and financial crises are alarming in both severity and length. We study the anatomy of the collapse by comparing the current precipitant (housing crisis) with the previous U.S. housing crisis of the early 1990s. Our analysis suggests that the greater severity of this episode is driven by several factors: default proclivity (to typical triggers) and bank lending retrenchment are different across the previous and current episodes. Most importantly however, we document different linkages between the housing sector, the banking sector and stock market across the two episodes. We conclude that the duration of the current episode is likely to significantly exceed the duration of the prior episode.