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Commercial real estate investors prefer coastal, gateway, markets for liquidity, demand density, and durable returns. Yet, these areas are more vulnerable to the effects of climate change from more intense and frequent weather events such as hurricanes and typhoons as well as to gradual changes such as sea-level rise. Recognition is growing of the risks that these events pose to investment performance, but little is known about how this risk has impacted property values and returns when an event such as a hurricane occurs. This is the first study to analyze the impact on property values and returns from hurricanes causing the most significant damage by value over the past 30-plus years throughout the nation. Using individual property data from the National Council of Real Estate Investment Fiduciaries database, we find a significant impact on the value and rates of return, after accounting for any additional capital expenditures for repairs, for properties that are in areas impacted by a hurricane, relative to areas that were not impacted by a hurricane. These impacts vary by property type and can last for several years after the hurricane hit land in the area. [ABSTRACT FROM AUTHOR]

Commercial real estate expected returns and expected rent growth rates are time-varying. Relying on transactions data from a cross-section of U.S. metropolitan areas, we find that up to 30% of the variability of realized returns to commercial real estate can be accounted for by expected return variability, while expected rent growth rate variability explains up to 45% of the variability of realized rent growth rates. The cap rate—that is, the rent-price ratio in commercial real estate—captures fluctuations in expected returns for apartments and retail properties, as well as industrial properties. For offices, by contrast, cap rates do not forecast (in-sample) returns even though expected returns on offices are also time-varying. As implied by the present value relation, cap rates marginally forecast office rent growth but not rent growth of apartments, retail properties, and industrial properties. We link these differences in in-sample predictability to differences in the stochastic properties of the underlying commercial real estate data-generating processes. Also, rent growth predictability is observed mostly in locations characterized by higher population density and stringent land-use restrictions. The opposite is true for return predictability. The dynamic portfolio implications of time-varying commercial real estate returns are also explored in the context of a portfolio manager investing in the aggregate stock market and Treasury bills, as well as commercial real estate. [ABSTRACT FROM PUBLISHER]

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We estimate the abnormal performance of real estate assets from cash flows to strengthen the position that open-end core real estate funds earn high (albeit levered) returns. We propose the use of detailed cash flows histories from the date of asset purchase (inception date) to the date of sale (liquidation date) plus the actual sale price, as well as appraised market values during the interim to determine a value for Jensen's alpha and beta for each investment made by an open-end core real estate fund. We examine how these Jensen's alphas are affected by (1) the rate of return from sector leverage, (2) the rate of return from incremental leverage, and (3) the rate of return from excess risk taking, and how the Jensen's alphas we estimate may overstate the "true" deal-level alpha. We offer an explanation that hinges on the observation that institutional investors prefer diversification over concentration of ownership due to their concern with minimizing portfolio risk. [ABSTRACT FROM AUTHOR]

This article reports empirical evidence on the nature and magnitude of real depreciation in commercial and multifamily investment properties in the United States. The article is based on a much larger and more comprehensive database than prior studies of depreciation in such properties, and it is based on actual transaction prices rather than appraisal estimates of property or building structure values. The article puts forth an "investment perspective" on depreciation, which differs from the tax policy perspective that has dominated the previous literature in the United States. From the perspective of the fundamentals of investment performance, depreciation is measured as a fraction of total property value, not just structure value, and it is oriented toward cash flow and market value metrics of investment performance such as internal rate of return and holding period return. Depreciation from this perspective includes all three age‐related sources of long‐term secular decline in real value: physical, functional and economic obsolescence of the building structure. The analysis based on 107,805 transaction price observations finds an overall average depreciation rate of 1.5%/year, ranging from 1.82%/year for properties with new buildings to 1.12%/year for properties with 50‐year‐old buildings. Apartment properties depreciate slightly faster than nonresidential commercial properties. Depreciation is caused almost entirely by decline in the property's current real income, only secondarily by increase in the capitalization rate ("cap rate creep"). Depreciation rates vary considerably across metropolitan areas, with areas characterized by space market supply constraints exhibiting notably less depreciation. This is particularly true when the supply constraints are caused by physical land scarcity as distinct from regulatory constraints. Commercial real estate asset market pricing, as indicated by transaction cap rates, is importantly related to depreciation differences across metro areas. [ABSTRACT FROM AUTHOR]

Since its inception, the NCREIF Property Index (NPI) has achieved preeminence as an indicator of the investment performance of institutionally-held commercial property in the United States. We introduce three new and refined series derived from NCREIF property data: the Market Value Index (MVI), Free Cash Flow Yield (FCFY), and the Capital Expense Ratio (CXR). While the NPI was designed to measure the risk and returns of the real estate asset class, these series optimize the property-level data in the NCREIF database to provide better indications of real estate value changes and operating performance. [ABSTRACT FROM AUTHOR]

This paper examines U.S. public and private commercial real estate returns at the aggregate level and by the four major property types over the 1994-2012 time period. Returns are carefully adjusted for differences between public and private markets in financial leverage, property type focus and management fees. Unconditionally, we find that passive portfolios of unlevered core real estate investment trusts (REITs) outperformed their private market benchmark by 49 basis points (annualized) over the 1994-2012 sample period. Our baseline vector autoregression results suggest that REIT returns do not embed additional commercial real-estate-specific information useful in predicting private market returns. These results strongly suggest that equity REIT returns react to fundamental (latent) asset pricing information more quickly than private market returns given their greater liquidity and price revelation. REITs therefore serve as a fundamental information transmission channel to private market returns when asset pricing variables are omitted. [ABSTRACT FROM AUTHOR]

Purpose -- The purpose of this paper is to provide an indication of the returns to commercial property lending over the last 30 years in the UK. Design/methodology/approach -- There is no long-term index of the returns to commercial property lending in the UK. This paper provides a partial solution by simulating the performance of bullet loans of various vintages, based on the value movements of the IPD index. Findings -- On average over the long-term debt returns are higher than equity returns. However, in certain periods, the losses incurred by real estate lenders are very large. Research limitations/implications -- No account taken of risk mitigation strategies used by lenders such as cross-collateralisation. Practical implications -- Provides an alternative approach to that recommended by the recent IPF "Vision For Real Estate Finance" Document based on the use of ICR. Makes the case for a loan equivalent of the IPD index. Social implications -- Reduced chance of resource misallocation and recession due to excess real estate lending. Originality/value -- Very limited information on private real estate debt returns. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

This is a theoretical examination of equity participation loans in commercial real estate. The model combines the standard capital asset pricing model (CAPM) with the method developed by Hamada (1969) to demonstrate the Modigliani-Miller (1958) prop-ositions regarding financial leverage and firm value. The results include the following: equity participation has no effect on the borrower's reservation value of the invest-ment, and the expected rate of return to the borrower's equity with equity participation equals the expected rate of return to equity with no equity participation minus the extent of equity participation times the risk premium attached to the investment with no equity participation. [ABSTRACT FROM AUTHOR]

Indexes of commercial property prices face much scarcer transactions data than housing indexes, yet the advent of tradable derivatives on commercial property places a premium on both high frequency and accuracy of such indexes. The dilemma is that with scarce data a low-frequency return index (such as annual) is necessary to accumulate enough sales data in each period. This paper presents an approach to address this problem using a two-stage frequency conversion procedure, by first estimating lower-frequency indexes staggered in time, and then applying a generalized inverse estimator to convert from lower to higher frequency return series. The two-stage procedure can improve the accuracy of high-frequency indexes in scarce data environments. In this paper the method is demonstrated and analyzed by application to empirical commercial property repeat-sales data. [ABSTRACT FROM AUTHOR]

The term structure of return volatility is estimated for both UK and US direct and securitised commercial real estate, using vector autoregressions. In a similar manner to the general stock market, returns of UK direct real estate and property shares, as well as US real estate investment trust returns, exhibit strong mean reversion. By contrast, US direct real estate returns show a considerable mean aversion effect over short investment horizons. This can be explained by the positive correlation between cash-flow and discount rate news, which can be interpreted as an under-reaction to cash-flow news. When estimating the return volatility of direct real estate markets, long-term investors need not be concerned about the choice of the parameter value used to unsmooth appraisal-based returns, because estimates of long-term volatility are almost unaffected by this choice. [ABSTRACT FROM AUTHOR]

Using REIT return data, bond data, and property holding data, the authors construct property market segment-specific indices of asset returns .The authors show that these pure-play indices can be employed to make pure, targeted investments in the commercial real estate market while retaining the liquidity, transparency, and pricing efficiency benefits of the well-developed public market in REITs. These pure-play indices compare favorably with existing property market return indices, displaying volatilities similar to transaction-based indices, such as the Moody's/REAL Commercial Property Price Index, but tending to lead the private market in time. The pure-play indices can be generated at a daily frequency without significant noise and at various levels of market segment granularity and, notably, have led the transactions-based direct property market indices during the recent market downturn. The authors' findings suggest that the REIT-based pure-play indices may provide a unique, new information source about the commercial property market, as well as a unique capability to facilitate targeted investments, construct hedges, and potentially support derivatives trading. [ABSTRACT FROM AUTHOR]

The article presents a study which examines the importance and performance of infrastructure in China from 1995-2006. The study uses risk-adjusted performance analysis to determine the added value of infrastructure development and its portfolio diversification benefits to commercial property and international private infrastructure investors. Results show that the infrastructure in China has provided significant risk-adjusted returns and some loss of diversification benefits in the portfolio. Moreover, it says that effective infrastructure and commercial property markets are important to international investors to boost their exposure to infrastructure and commercial property markets in the country as well as their international investment portfolios.

Focuses on the condition of the commercial property industry in New Zealand as of October 2005. Rate of return of the industrial property market in the country in 2005; Building supply in Auckland; Factors that affect the market rates in Wellington, including an increasing size of the public sector. INSET: OFFICE RELOCATION.

The article offers a risk-return comparison of public and private real estate equities in the U.S. as of 2003. From 1981 to 2001, returns on publicly traded real estate investment trusts (REITs) averaged 14.7%, while private real estate returns have averaged just 9.7%. The market capitalization of REITs, such as its debt and equity, has exceeded that of the National Council of Real Estate Investment Fiduciaries Property Index since the mid-1990s. REITs accounted for only 15%-20% of the total market capitalization for the two indexes prior to 1993. Even so, they have averaged an approximate 65% market share since 1992.

The article provides a new approach to conducting property-level performance attribution for the management of directly held real estate investment assets in the U.S. as of 2003. In the past decade, investment performance attribution has become more widely used along with the rise of style-based investment management and the development of benchmark indexes that represent style-pure investment performance. Performance attribution is designed to help understand the determinants of the historical performance of investment managers during given periods of time. As a money-weighted return, the internal rate of return is more appropriate for investment performance measurement due to its sensitivity to the effect of cash flow timing.

This paper empirically investigates the behavior over time of excess returns (risk premium) on commercial real estate in Singapore, one of the major Asian tiger economies. Specifically, the first and second conditional moments on office and retail real estate excess returns are related to the conditional variances and covariances of five specified macroeconomic factors: growth rate in gross domestic product, growth rate in industrial production output, unexpected inflation, short-term interest rates and market portfolio. The conditional variances of the five macroeconomic factors are time-varying. In addition, significant results are obtained from the macroeconomic volatilities as useful predictors for the expected risk premiums. This evidence can be very useful to international investors and portfolio managers interested in Asian property markets. [ABSTRACT FROM AUTHOR]

High and rising vacancy rates combined with falling rents and concerns about future tax changes have created a sense of pessimism in the commercial real estate market. At the same time, however, prices of existing commercial real estate have continued to rise in many parts of the U.S. The article lays out the theoretical framework for analyzing the commercial real estate market. The key point is that real estate is both a factor of production and an asset. The market clearing price for commercial real estate as a factor of production is the rental income on building space. The rate of return on commercial real estate as an asset must be considered with that of alternative assets such as stocks and bonds.

This study examines the existence of excess returns of the office, retail and industrial real estate sectors in Hong Kong using time series of both valuations and transaction prices. the analysis covers the period from 1980 to 1995. if valuations are an accurate reflection of transaction prices then excess returns, if they exist, should be detected in both series. Our findings confirm that excess returns can be detected in both valuation ant transaction-based series. They are not, however, persistent although there appear to be greater opportunities for earning excess returns in the office sector. [ABSTRACT FROM AUTHOR]