Martin Hoesli

Do Housing Submarkets Really Matter

We maintain that the appropriate definition of submarkets depends on the use to which they will be put. For mass appraisal purposes, submarkets should be defined so that the accuracy of hedonic predictions will be optimized. Thus we test whether out-of-sample hedonic value predictions can be improved when a large urban housing market is divided into submarkets and we explore the effects of alternative definitions of submarkets on the accuracy of predictions. We compare a set of submarkets based on small geographical areas defined by real estate appraisers with a set of statistically generated submarkets consisting of dwellings that are similar but not necessarily contiguous. The empirical analysis uses a transactions database from Auckland, New Zealand. Price predictions are found to be most accurate when based on the housing market segmentation used by appraisers. We conclude that housing submarkets matter, and location plays the major role in explaining why they matter.

International Evidence on Real Estate Securities as an Inflation Hedge

The current study investigates whether real estate securities continue to act as a perverse inflation hedge in foreign countries given security design differences. Both a stationary and a nonstationary risk free rate are alternatively used in conjunction with the methodology of Fama and Schwert (1977) and also the methodology of Geske and Roll (1983) to investigate this question. Real estate securities provide a worse hedge against inflation relative to common stocks in some countries and are comparable to stocks in other countries. Also, evidence supports the reverse causality model of Geske-Roll.

The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach

Historic analysis of the inflation hedging properties of stocks has produced anomalous results, with stocks often appearing to offer a perverse hedge. This has been attributed to the impact of real and monetary shocks to the economy, which influence both inflation and asset returns. It has been argued that real estate should provide a better hedge: however, empirical results have been mixed. This paper explores the relationship between commercial real estate returns and economic, fiscal and monetary factors and inflation for US and UK markets. Comparative analysis of general equity and small capitalization stock returns is carried out with inflation divided into expected and unexpected components. The analyses are undertaken using an error correction approach. In the long run, once real and monetary variables are included, asset returns are positively linked to anticipated inflation but not to inflation shocks. Adjustment processes are, however, gradual and not within period. Real estate returns, particularly private market returns, exhibit characteristics that differ from those of stocks.

Are REITs Real Estate? Evidence from International Sector Level Data

The aim of this study is to examine whether securitized real estate returns reflect direct real estate returns or general stock market returns using international data for the U.S., U.K., and Australia. In contrast to previous research, which has generally relied on overall real estate market indices and neglected the potential long-term dynamics, our econometric evaluation is based on sector level data and caters for both the short-term and long-term dynamics of the assets as well as for the lack of leverage in the direct real estate indices. In addition to the real estate and stock market indices, the analysis includes a number of fundamental variables that are expected to influence real estate and stock returns significantly. We estimate vector error-correction models and investigate the forecast error variance decompositions and impulse responses of the assets. Both the variance decompositions and impulse responses suggest that the long-run REIT market performance is much more closely related to the direct real estate market than to the general stock market. Consequently, REITs and direct real estate should be relatively good substitutes in a long-horizon investment portfolio. The results are of relevance regarding the relationship between public and private markets in general, as the ‘duality’ of the real estate markets offers an opportunity to test whether and how closely securitized asset returns reflect the performance of underlying private assets. The study also includes implications concerning the recent financial crisis.

Real estate portfolio diversification by property type and region

Analyses data from the USA and UK to determine whether diversification within a region by property type is better than diversification between regions within a property type. Compares both strategies to full diversification by both property type and region. Calculates and compares property type and regional correlation matrices. Produces efficient frontiers and calculates principal components to determine if there are dominant property type or regional dimensions to real estate returns. Suggests that for the USA a purely retail portfolio diversified over all regions would have been almost as effective as a fully diversified portfolio. In the UK, there is less diversity across regions within retail property. Overall, there is no simple conclusion applicable to all regions and all property types in either country.

An Investigation of the Change in Real Estate Investment Trust Betas

The betas on equity real estate investment trusts (EREITs) have undergone a structural shift in the past 20 years. We show that this is the result of the lower variability of EREIT returns and argue that the decrease in the standard deviation of EREIT returns can be attributed to the increasing levels of information about EREITs. We find that the number of analysts following the EREITs industry, as measured by IBES, can significantly explain the drop in the standard deviation for most EREITs. This was also found to be the case for another proxy for the level of information—the trading volume of the EREIT index.

What factors determine international real estate security returns

We use constrained cross-section regressions to disentangle the effects of various factors on international real estate security returns. Besides a common factor, pure country, property type, size, and value/growth factors are considered. The value/growth measure that is used in this paper provides for each security the relative importance of the value and growth components, rather than a binary classification. The value/growth factor is found to be volatile and to have a substantial effect on returns over the analyzed period February 1990-April 2003. Country factors are the dominant factors, and size is shown to have a negative impact on returns. Statistical factors derived by means of cluster analysis explain about one third of specific returns on international real estate securities. The implication for portfolio managers is that failing to recognize the importance of the various factors leads to the portfolio being exposed to systematic risk.

Why do the swiss rent

At less than 34%, Switzerland has the lowest home ownership rate in Western Europe. This may seem odd given the economic strength of the country. We use household survey data for five Swiss cantons to explore some possible reasons for this. We estimate a tenure choice equation that allows us to analyze the impacts of a number of key variables on the ownership rate. We pay particular attention to the relative cost of owning and renting, which is a function of house prices, rents, and the user cost of owning. The latter is a function of income tax policy and expected house price inflation, among other things. We also measure mortgage underwriting criteria and consider rent control and other policies affecting rental housing. By simulating a number of hypothetical changes to taxation and other policies, underwriting criteria, and price levels, we assess the importance of these variables in explaining the ownership rate. We conclude that high house prices—relative to household incomes and wealth—and the tax on imputed rent are the most important causes of Switzerland’s low ownership rate.

Homogeneous Commercial Property Market Groupings and Portfolio Construction in the United Kingdom

Property portfolios are traditionally constructed by diversifying across geographical areas, property types, or a combination of both. In the United Kingdom it is normal practice to use regions rather than towns or local market areas as the geographical divisions. The authors use cluster analysis to construct homogeneous groups from 157 UK local markets, by means of commercial property returns. The results show strong property-type dimensions and only very broad geographical dimensions in the clusters. These clusters are found, in general, to have temporal stability with changes in cluster membership being explained by the changing economic geography of the United Kingdom. The cluster-derived groupings are used to derive efficient investment frontiers and are compared with frontiers based on conventional heuristic groupings. It is shown that strategies based on parsimonious cluster-based groupings, appropriate for smaller investors, generate results that are comparable with those of conventional groupings and capture the main drivers of property performance.

The Spatial Dimensions of the Investment Performance of UK Commercial Property

In this paper, cluster analytical techniques are used to examine dimensions of diversification in UK commercial property markets. A variety of techniques are used on a dataset which contains property returns for 156 property markets (67 retail locations, 64 office locations and 25 industrial locations). The results strongly suggest that property type is the most important dimension in determining different market behaviour. There is also evidence of a geographical factor, but one which does not conform to the conventional 11-region administrative classification but rather suggests a London factor.