Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany

Sense and Nonsense of Diversification Based on Economic Factors: Do Regional Economic Factors Influence Regional Real Estate Investment Returns?

Florian Heydenreich, Daniel Kohlert and Andreas OehlerBamberg University, GermanyChair of Finance

ERES conference 200924th – 27th of July

Stockholm

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(1) Introduction

Successful real estate investment depends on an understanding of the determinants of real estate returns (Fraser 1986).

Various studies have shown that economic factors are important determinants of real estate returns (e.g., Chin 2003,

Jackson / White 2005, Ziering / Hess 1995).

Most studies, however, are based on national economic data(e.g., Hendershott et al. 1999 and 2002, Wheaton et al. 1997).

Potential conflict between national economic data and regional, local or object-specific return data and investment strategies.

Heydenreich, Kohlert, Oehler


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(2) Data and Methodology

Level: NUTS 2 (27 of 37 UK regions)Time horizon: 1981 – 2004 (yearly)

Return data: IPD Investment Property DatabankAnnual total return (TRt), income return (IRt) and capital growth (CAt) data for office buildings

Economic data: Cambridge EconometricsAnnual GDP (GDPt), unemployment (UEPt), and total investment (INVt)



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Panel Analysis

• Static random-effects model (GLS):

Rit = β1x1it+…+ βKxKit + μi + νit

• Dynamic random-effects model (GMM):

Rit = β0Ri, t-1+ β0Ri, t-2+ βKxKit +…+ βKxKit + μi +

νit

Rit: return variable (CA, IR, TR) of region i in period t

xKit: macroeconomic demand variable (GDP, UEP, INV) of region i in period t

βK: parameter, μi: region specific intercept, νit: overall remainder

(2) Data and Methodology

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(3) Results


DescriptivesCapital Growth

R = Region

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(3) Results


DescriptivesInvestment Return

R = Region

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(3) Results


DescriptivesTotal Return

R = Region

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(3) Results



Descriptives (Panel)

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Panel Analysis: Capital Growth


Panel Analysis: Capital Growth

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Panel Analysis: Investment Return


Panel Analysis: Investment Return

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(3) Results


Panel Analysis: Total Return

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(3) Results


The estimated regression coefficients reveal autoregression for each of the dependent variables

Economic factors influence real estate performance criteriaHowever: UEP not important, GDP not the expected sign

Data (sample) error? Methodological errors? Does the identical slope assumption make sense?

Extra tests (ADR)

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(4) Extra Tests


Autoregressive Distributed Lag Model (n=2, p=1; regional)

GDP INV UEP

CA 7 9 1

IR 2 15 3

TR 7 7 1

GDP INV UEP

CA 12 14 1

IR 6 16 5

TR 13 15 2

(multivariate, step-ls!)(univariate)

Number of significant regional results per criterion

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(5) Conclusion


The available time series are still to short to offer safe statements about the influence of the regional economic factors GDP, INV and UEP on regional real estate performance.

At this point, however, it cannot be recommended to ignore the peculiarities of single regions and to rely solely on national data.

The lags of the dependent variables often seem to explain regional real estate performance better than demand-side variables.

There might also be a strong influence of non-macro-economic factors, particularly supply-side factors, that have greater explanatory power.

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Thank you

for your

comments!



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References

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References

McGough T. and S. Tsolocas, Forecasting Commercial Rental Values Using ARIMA Models, Journal of Property Valuation and Investment, 1994, 13:5, 6-22. McGough T. and S. Tsolocas, Property Cycles in the UK: an Empirical Investigation of the Stylised Facts, Journal of Property Finance, 1995, 6:4, 45-62. McGough T., O. Olkkonen and S. Tsolocas (1998), The Cyclical Behaviour of Office Rents in Helsinki, European Real Estate Society’s Annual Conference 1998, Maastricht, The Netherlands. Mueller, G. and B. Ziering, Real Estate Portfolio Diversification Using Economic Diversification, Journal of Real Estate Research, 1992, 7:4, 375-386.Mueller, G., Refining Economic Diversification Strategies for Real Estate Portfolios, Journal of Real Estate Research, 1993, 8:1, 55-68.Nelson, T. and S. Nelson, Regional Models for Portfolio Diversification, Journal of Real Estate Portfolio Management, 2003, 9:1, 71-88.Nitsch, H., Die Bedeutung lokaler Marktlagen für die Immobilieninvestition, Zeitschrift für Immobilienökonomie, 2004, 2, 66-82.Quigley, J., Real Estate Prices and Economic Cycles, International Real Estate Review, 1999, 2:1, 1-20.Shilton, L., The changing demand for office space, Real Estate Review, 1995, 25:2, 89-94.Tsolacos, S., G. Keogh and T. McGough, Modelling use, investment and development in the British office market, Environment and Planning A,1998, 30, 1409-1427.Tsolacos, S. and T. McGough, Rational Expectations, Uncertainty and Cyclical Activity in the British Office Market, Urban Studies, 1999, 36:7, 1137-1149.Viezer, T., Evaluating Within Real Estate Diversification Strategies, Journal of Real Estate Portfolio Management, 2000, 6:1, 75-95.West, T. and A.C. Worthington, Macroeconomic risk factors in Australian commercial real estate, listed property trusts and property sector stock returns: A comparative analysis using GARCH-M, Journal of Financial Management of Property and Construction, 2006, 11:2, 21-31.Wheaton, W., The Cyclic Behavior of The National Office Market, AMERICAN REAL ESTATE AND URBAN ECNOMOMICS ASSOCIATION Journal, 1987, 5:4, 281-299.Wheaton, W.C., R.G. Torto and P. Evans, The cyclic behaviour of the Greater London office market, Journal of Real Estate Finance and Economics, 1997, 15:1, 77-92.Wurtzebach, C., The Portfolio Construction Process, Prudential Real Estate Investors, 1998.Ziering, B. and R. Hess, A Further Note on Economic Versus Geographic Diversification, Real Estate Finance, 1995, 12:3, 53-60.



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Return Formula



tt

t

tt

tttttt CECV

NR

CECV

CECVCVIRCATR

1

1

CV = capital value, CE = capital expenditures, NR = net rent

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CA, GDP

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CA, INV

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CA, UEP

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IR, GDP

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IR, INV

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IR, UEP

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TR, GDP

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TR, INV

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TR, UEP

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CA, ALL

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IR, ALL

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TR, ALL

Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany

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Transcript of Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany