Yale
International Center for Finance
Working Paper No. 99-03
Yale
School of Management
Working Paper No. Forthcoming
March 7, 1999
Global Real Estate Markets: Cycles And
Fundamentals
Bradford Ca
Yale University
William Goetzmann再线翻译
Yale School of Management
K. Geert Rouwenhorst
Yale School of Management
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Global Real Estate Markets -- Cycles and Fundamentals
Bradford Ca, Yale University
William Goetzmann, Yale School of Management
K. Geert Rouwenhorst, Yale School of Management
Very Preliminary! Comments Welcome
March 7, 1999
Abstract
The correlations among international real estate markets are surprisingly high, given
the degree to which they are gmented. While industrial, office and retail properties
exist all around the world, they are not economic substitutes becau of locational
specificity. In addition, the broad curitization of real estate property companies
has, until recently, lagged that of other types of companies. Never-the-less,
international property returns move together in dramatic fashion. In this paper, we
u eleven years of global property returns to explore the factors influencing this co-
movement. We attribute a substantial amount of the correlation across world
property markets to the effects of changes in GNP, suggesting that real estate is a bet
on fundamental economic variables which are correlated across countries. A
decomposition shows that a local production factor is more important in some
countries than in others.
Plea address comments to:
familiar用法William N. Goetzmann
Yale School of Management
加油的英语怎么说Box 208200
大学生个人简历封面
New Haven, CT. 06520-8200
英语读音器Acknowlegements: We thank Ibbotson Associates and members of the International Commercial Pro
pat
perty Associates consortium for u of their data. We thank the International Center for Finance at the Yale School of Management for rearch support.
I. Introduction
The real estate business is distinguished from almost all others by the fact that its “product”is not portable. For the most part, property owners compete locally for business. While inter-urban competition for industrial, office or retail space exists, customer choice depends upon a number of economic factors beyond the price and quality of the space. Thus, one would expect the correlation of changes in property values across markets to diminish with the distance between them. There are no short-term arbitrage forces preventing prices in one local market from suddenly getting hot while prices in another local market are dropping -- buildings from one market cannot be moved to the other. For the same reasons, one might also expect international property markets to exhibit low correlations due to the difficulties of re-locating business across national boundaries. Studies measuring the diversification benefits of real estate and other ast class suggest real estate compares favorably in this dimension (e.g. Eicholtz, 1996, Eicholtz and Hartzell, 1996, Eicholtz et. Al, 1998, Liu and Mei, 1998, Liu, Hartzell and Hoeli, 1997). After looking at recent published empirical evidence, it is clear that international real estate investment is uful for portfolio diversific
ation.
This logic makes the evidence about co-movement in international property returns all the more striking. Goetzmann and Wachter (1996) [GW] document that the real estate crash in the early 1990's was felt by nearly every country in the world. Despite their paration by political boundaries and great distances, the world’s office markets plunged into a slump together. While economists looked for local reasons for local decreas in property values, the reality is that there were no safe havens for property investors in the years 1991 and 1992. Diversification did not help. The conjecture in GW was that this slump was due to exposures to global GDP. Unfortunately,
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insufficient time-ries data prevented any formal test of the conjecture. Work by Quan and Titman (1998), using the same data sources as GW and longer time ries document that real estate is significantly correlated to stock returns and to changes in GDP. In his in-depth analysis of the international real estate slump of the 1990’s, Renaud (1997) considers the degree to which unique events in the late 1980’s may have led to the correlated change in real estate prices and the global economy. He also discuss the co-cyclycality of global economies and real estate. Together, the
recent studies suggest that a mix of global and local economic factors influence the world’s real estate markets.
In this paper, we u 11 years of commercial property data to examine the relationship between GNP changes property returns. We explore the relationship in considerably more depth than GW and take a different approach to GDP effects than Quan and Titman. Our goal is to parate global from local economic effects on the covariance of real estate returns. In particular, we test to e whether the correlations across global real estate markets are due to common exposures to changes in world GDP. In addition, we estimate the incremental value of local economic fluctuations in explaining real estate performance. We find strong evidence to show that removing the effects of both country-specific GDP and global GDP from returns significantly decreas global real estate market correlations. Of the two, global GDP has the greatest effect.
The implications of our results are twofold. First, world real estate markets are largely correlated through common GDP effects. Thus, we find that even markets that are gmented by definition can exhibit significant correlations if they are expod to a common source of risk. Second, we show that an investment in a global real estate portfolio is esntially a bet on broad trends in global production.
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II. Data
International property return data is difficult to obtain. Some authors have collected returns from publically traded property companies in a number of countries for successful analysis. This is uful but not always reprentative of the markets in all countries, and depends upon the existence of public markets in property companies. Our data source is a recently dissolved global consortium of real estate firms that collectively shared yield and effective rent data sampled and asmbled on an annual basis. Until recently, the firms were affiliated through International Commercial Property Associates (ICPA), with a successor agreement with ONCOR International. Over the past decade, their estimates of yields and effective rents were formed by firms operating in each market according to commonly agreed upon standards. The estimates were published as ICPA’s "International Property Bulletin" and ONCOR’s "World Real Estate Review," and "European Property Bulletin." Both ICPA and ONCOR have cead publishing the data, but London-bad Hillier Parker has continued to organize European firms to share data for European markets. In addition, the data for Asian real estate markets is also collected by veral affiliates of Hillier Parker and published by its Hong Kong affiliate, Brooke Hillier Parker, in "Asian Property Market Survey." Throughout the time IC
本科肄业PA existed, new markets entered -- particularly emerging markets in Asia. The existence of the markets in the databa is undoubtably conditioned upon investor interest, and thus potentially biad by positive performance. Thus, some of the markets included in our databa may have been “backfilled” and the paucity of data about other markets, particularly the lack of industrial and retail information about Japan, for example, may result from recent lack of interest in international investing there.
Since we do not have income and capital appreciation returns reported as such in the
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