Real Estate Commons^™

The Consequences Of Reit Index Membership For Return Patterns, Andrey Pavlov, Eva Steiner, Susan Wachter

Eva Steiner

The impact of stock market index membership on REIT stock returns is unclear. Returns may become more like those of other indexed stocks and less like those of their underlying properties. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns. However, index membership also enhances the link between REIT returns and the underlying real estate, consistent with improved pricing efficiency.

Where, When And How Do Sophisticated Investor Respond To Flood Risk?, Piet M. A. Eichholtz, Eva Steiner, Erkan Yönder

Eva Steiner

While the empirical evidence on the pricing of flood risk exposure in residential real estate held by uninformed households is mixed, this study shows that sophisticated investors in commercial real estate markets rationally respond to heightened flood risk by bidding down the prices of exposed assets. Using a detailed property-level database on commercial real estate transactions completed in New York, Boston, and Chicago before and after the shift in the salience of flood risk caused by Hurricane Sandy, we document that properties exposed to flood risk experience slower price appreciation after the storm than equivalent unexposed properties. We further show …

The Rate Of Return On Real Estate: Long-Run Micro-Level Evidence, David Chambers, Christian Spaenjers, Eva Steiner

Eva Steiner

We provide evidence that direct real estate investments are less profitable and more risky in the long run than previously thought. We hand-collect property-level data on realized income, expenses, and transaction prices from the archives of four large institutional investors in the U.K.—historically important Oxbridge colleges—for the period 1901–1970. Gross income yields mostly fluctuate around 5%, but trend to lower (higher) levels for agricultural and residential (commercial) real estate near the end of our sample period. Operating costs mean that net yields are about one third lower than gross yields on average. Long-term real income growth rates are between -1.0% …

Financial Flexibility And Manager-Shareholder Confict: Evidence From Reits, Timothy Riddiough, Eva Steiner

Eva Steiner

Using equity REIT data, we show empirically that the use of unsecured debt, which contains standardized covenants that place limits on total leverage and the use of secured debt, is associated with lower leverage outcomes. We then show that firm value is sensitive to leverage levels, where lower leverage is associated with higher firm value. In the presence of weak managerial governance, our results suggest that unsecured debt covenants function as a managerial commitment device that preserves the firm’s debt capacity to enhance financial flexibility.

Economic Fundamentals, Capital Expenditures And Asset Dispositions, Brent Ambrose, Eva Steiner

Eva Steiner

Research on the disposition effect in real assets to date ignores the active management component of these investments. Active management notably includes decisions about follow-up investment in the form of capital expenditures, as well as dispositions. Using a real option framework, we develop testable hypotheses and provide empirical evidence for the relationships between economic fundamentals, capital expenditures, property values, and the subsequent likelihood of sale. Our results shed new light on the evidence for the disposition effect.

Fundamental Drivers Of Dependence In Reit Returns, Jamie Alcock, Eva Steiner

Eva Steiner

We analyse the empirical relationships between firm fundamentals and the dependence structure between individual REIT and stock market returns. In contrast to previous studies, we distinguish between the average systematic risk of REITs and their asymmetric risk in the sense of a disproportionate likelihood of joint negative return clusters between REITs and the stock market. We find that REITs with low systematic risk are typically small, with low short-term momentum, low turnover, high growth opportunities and strong long-term momentum. Holding systematic risk constant, the main driving forces of asymmetric risk are leverage and, to some extent, short-term momentum. Specifically, we …

The Tension Between Monetary Policy And Financial Stability: Evidence From Agency Mortgage Reits, W. Scott Frame, Eva Steiner

Eva Steiner

The prolonged use of unconventional monetary policies since the financial crisis has resulted in concerns about the potential for such policy accommodation to undermine financial stability. Recent research identifying a “risk-taking channel” of monetary policy suggests that rapidly growing shadow banking organizations are of particular concern. In this paper, we study Agency mortgage REITs (Agency MREITs), which are specialized, tax-exempt financial institutions, whose rapid growth raised systemic risk concerns by the Financial Stability Oversight Council. After controlling for key variables that drive the Agency MREIT business (level, slope, and expected volatility of the term structure as well as the mortgage …

Reit Capital Structure: The Value Of Getting It Right, Eva Steiner

Eva Steiner

An analysis of the capital structure of commercial real estate investment trusts finds that the strongest REITs overall tend to employ lower leverage and longer debt maturity, maintain larger proportions of fixed-rate debt, rely less on secured debt, have a greater line of credit capacity but use it less, and hold smaller cash reserves. The REITs’ strength is measured by Tobin’s q, which expresses the ratio of the market value of assets relative to their book value. The study examines yearly data for the years 1993 through 2013 for 137 REITs based in the United States and the years 2001 …

Capital Expenditures, Asset Dispositions, And The Real Estate Cycle, Brent W. Ambrose, Eva Steiner

Eva Steiner

Recent empirical research provides evidence on the asset disposition choices of individual and institutional real estate investors that is consistent with the `disposition effect'. We propose a value-add investment strategy as an alternative rational explanation for the observed patterns in disposition choices. The main value-add mechanism in real estate investment is capital expenditures. However, capital expenditure investment is a real option whose exercise depends on its moneyness, which is a function of the economic environment. Therefore, we study the links between economic conditions, building-level capital expenditures, and subsequent transactions throughout the real estate cycle. We present empirical evidence consistent with …

The Consequences Of Reit Index Membership For Return Patterns, Andrey Pavlov, Eva Steiner, Susan Wachter

Eva Steiner

We study the impact of S&P index membership on REIT stock returns. Given the hybrid nature of REITs, their returns may become more like those of other indexed stocks and less like those of their underlying properties. The existing literature does not offer clear predictions on these potential outcomes. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns after controlling for the stock characteristics that determine index membership. We also document that index membership enhances the link between REIT stock returns and …

Leverage, Volatile Future Earnings Growth And Expected Stock Returns, Jamie Alcock, Eva Steiner, Kelvin Jui Keng Tan

Eva Steiner

We provide theory and evidence to complement Choi's [RFS, 2013] important new insights on the returns to equity in `value' firms. We show that higher future earnings growth ameliorates the value-reducing effect of leverage and, because the market for earnings is incomplete, reduces the earnings-risk sensitivity of the default option. Ceteris paribus, a levered firm with low (high) earnings growth is more sensitive to the first (second) of these effects thus generating higher (lower) expected returns. We demonstrate this by modeling equity as an Asian-style call option on net earnings and find significant empirical support for our hypotheses.

Reit Capital Structure Choices: Preparation Matters, Andrey Pavlov, Eva Steiner, Susan Wachter

Eva Steiner

Sun, Titman, and Twite (2015) find that capital structure risks, namely high leverage and a high share of short-term debt, reduced the cumulative total return of US REITs in the 2007-2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006, was associated with a significantly higher cumulative total return 2007-2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross-sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those …

The Interrelationships Between Reit Capital Structure And Investment, Jamie Alcock, Eva Steiner

Eva Steiner

A Burning Question: Does Arson Increase When Local House Prices Decline?, Michael D. Eriksen, James M. Carson

Michael D Eriksen

We construct panel data on house prices and the determined cause of 4.8 million individual fires in the United States between 1986 and 2010 to test whether decreases in local housing market prices coincided with increases in arson. Since some insured homeowners may attempt to disguise the actual cause of fire as accidental, we also examine how decreases in local house prices are associated with changes in the total number of fires and the probability of determined causes of accidental fires. For the sample period, our results suggest that declines in local house prices coincided with increases in arson, the …

Housing Policies In Singapore: Evaluation Of Recent Proposals And Recommendations For Reform, Sock Yong Phang, David K. C. Lee, Alan Cheong, Kok Fai Phoon, Karol Wee

David LEE Kuo Chuen

The Singapore housing market is unusual in its high homeownership rate, the dominance of HDB housing, and the extensive intervention of the government in regulating housing supply and demand in both the HDB and private housing sectors. Recent rapid population increases in a low interest rate and high global liquidity environment has resulted in accelerated house prices increases in Singapore. Earlier this year, the government launched “Our Singapore Conversation” of which discussion on housing policies constitutes one major component. This “conversation” comes in the wake of several consecutive rounds of measures to stabilize housing prices using various instruments. This paper …

Market Structure And Growth Potential Of Singapore Reits, Cher Chiew Francis Koh, Kuo Chuen Lee, Kok Fai Phoon, Ee Seng Seah

David LEE Kuo Chuen

No abstract provided.

Commonality In Liquidity And Real Estate Securities, Anjeza Kadilli

Anjeza Kadilli

We conduct an empirical investigation of the pricing and economic sources of commonality in liquidity in the U.S. REIT market. Taking advantage of the specific characteristics of REITs, we analyze three types of commonality in liquidity: within-asset commonality, cross-asset commonality (with the stock market), and commonality with the underlying property market. We find evidence that the three types of commonality in liquidity are priced in REIT returns but only during bad market conditions. We also find that using a linear approach, rather than a conditional, would have underestimated the role of commonality in liquidity risk. This explains (at least partly) …

Major Personal Finance Faq, Richard H. Serlin

Richard H. Serlin

A rare source of detailed, extensive, state of the art answers to some of the most important questions in personal finance.

Housing Vouchers And The Price Of Rental Housing, Michael D. Eriksen, Amanda Ross

Michael D Eriksen

We estimate the effect of increasing the supply of housing vouchers on rents using a panel of housing units in the American Housing Survey. We do not find that an increase in vouchers affected the overall price of rental housing, but do estimate differences in effects based on an individual unit’s rent before the voucher expansion. Our results are consistent with voucher recipients renting more expensive units after receiving the subsidy. We also find that the largest price increases were for units near the maximum allowable voucher rent in cities with an inelastic housing supply.

The Future Of Fannie And Freddie, Mark A. Calabria, Michael E. Levine, David J. Reiss, Lawrence J. White, Mark Willis

David J Reiss

This is a transcript of a panel discussion titled, “The Future of Fannie and Freddie.” The panelists were Dr. Mark Calabria from the Cato Institute; Professor David Reiss from Brooklyn Law School; Professor Lawrence White from NYU Stern School of Business; and Dr. Mark Willis from NYU’s Furman Center for Real Estate and Urban Policy. The panel was moderated by Professor Michael Levine from NYU School of Law. Panelists looked at economic policy and future prospects for Fannie and Freddie. The remarks have not been edited by the panelists.

Unexpected Inflation, Capital Structure And Real Risk-Adjusted Firm Performance, Jamie Alcock, Eva Steiner

Eva Steiner

Goliath Versus Goliath In Hight-Stakes Mbs Litigation, Bradley T. Borden, David J. Reiss

Bradley T. Borden

The loan-origination and mortgage-securitization practices between 2000 and 2007 created the housing and mortgage-backed securities bubble that precipitated the 2008 economic crisis and ensuing recession. The mess that the loan-origination and mortgage-securitization practices caused is now playing out in courts around the world. MBS investors are suing banks, MBS sponsors and underwriters for misrepresenting the quality of loans purportedly held in MBS pools and failing to properly transfer loan documents and mortgages to the pools, as required by the MBS pooling and servicing agreements. State and federal prosecutors have also filed claims against banks, underwriters and sponsors for the roles …

The Impact Of Reversing Regulatory Arbitrage On Loan Originations: Evidence From Bank Holding Companies, Lan Shi, David H. Downs

Lan Shi

No abstract provided.

The Effect Of Mortgage Broker Licensing On Loan Origination Standards And Defaults Under The Originate-To-Distribute Model: Evidence From The U.S. Mortgage Market, Lan Shi, Yan Zhang

Lan Shi

No abstract provided.

The Impact Of Second Loans On Subprime Mortgage Defaults, Michael D. Eriksen, James B. Kau, Donald C. Keenan

Michael D Eriksen

An estimated 12.6% of primary mortgage loans were simultaneously originated with a second loan from 2004 until 2008, although relatively little is known about how the presence of such subordinate loans affects the default decisions of borrowers. We use a novel data series of loan servicing records from 2002 until 2010 to identify such borrowers and find evidence that the default behavior of these borrowers significantly differs from borrowers without second loans. Estimating a discrete-time proportional odds hazard model, we find borrowers with a second loan were 62.7% more likely to default each month on their primary loan when conditioning …

Greenbacks For Building Green: Does A Lender For Sustainable Construction Projects Need To Make Adjustments To Its Current Practices?, Darren Prum

Darren A. Prum

In the development of real property, the availability of money to secure construction resources becomes an important factor for success. The construction loan plays a central role in providing funds to erect a building on real property, but a lender faces numerous exposures that might result in a loss. In evaluating a project to determine its viability and to uncover any exposure it might present, a lender will conduct an extensive underwriting review process and will use mitigation techniques through the construction loan agreement and disbursement requirements to reduce the perceived risks to an acceptable business level, for those developments …

The Disciplining Effect Of Concern For Referrals: Evidence From Real Estate Agents, Lan Shi, Christina Tapia

Lan Shi

No abstract provided.

Falling Short: Has The Sec’S Quest To Control Market Manipulation And Abusive Short-Selling Come To An End Or Has It Really Just Begun?, Richard Ramirez

Richard E. Ramirez, J.D. | CFCS

No abstract provided.

Incentive Effect Of Piece Rate Contracts: Evidence From Two Small Field Experiments, Lan Shi

Lan Shi

No abstract provided.

Canadian Residential Mortgage Markets: Boring But Effective?, John Kiff

John Kiff

Klyuev (2008) concluded that the Canadian market for housing finance is highly advanced and sophisticated, but financing options were somewhat limited, particularly at terms longer than five years. This paper argues that the paucity of longer-term loans is caused by a five-year maturity cap on government-guaranteed deposit insurance, and a prepayment penalty limit on residential mortgage loans in the Interest Act. That said, the availability and cost of residential loans for prime borrowers are comparable to those in the United States.