Journal of Property Investment & Finance

Replacement cost and market value : Table of Contents

Peter Wyatt — Mon Oct 05 11:22:02 BST 2009

Abstract:
Purpose – Several problems arise from the current valuation standards and guidance in relation to the replacement cost method and they can be classified as definitional and methodological. Definitional problems include confusion over the precise meaning of the terms cost, price and value and clarification of the economic concepts of substitution and “highest and best use” in the cases of market-based and replacement cost methods. Methodological problems include the difficulty in finding market-derived inputs, particularly when estimating depreciation, and the need to make end adjustments. These matters raise the question as to whether a replacement cost method is compatible with a market basis of value. This paper aims to address this issue. Design/methodology/approach – The paper reviews academic literature and professional practice guidance in relation to the replacement cost method of valuation and the market value basis of valuation. Findings – Defining replacement cost as a method of estimating market value rather than a separate basis of value blurs the distinction between cost and value. This paper argues that market value assumptions do not hold in the case of the replacement cost method. Originality/value – The paper seeks to stimulate debate on the current professional guidance for the use of the replacement cost method of valuation.

The impact of changing risk characteristics in the A-REIT sector : Table of Contents

Anthony J. De Francesco, Luke R Hartigan — Mon Oct 05 11:22:02 BST 2009

Abstract:
Purpose – The Australian REIT (A-REIT) market has undergone significant change over the past ten years with a shift from passive investment strategies to more active investment strategies in an attempt to deliver higher return performance. However, this has dramatically changed the risk characteristics of A-REITs. Essentially, the sector has become more risky. Factors contributing to the increasing risk profile include: rising gearing levels; greater offshore exposure; evolving management structure towards stapled trusts, and growing market concentration. This paper aims to address these issues. Design/methodology/approach – In an attempt to gauge the impact of the changing risk characteristics over time the paper employs two formal risk measures: time-varying beta and news impact curves. Both measures indicate that the sector has become more risky. Indeed, it could be argued that the pronounced fall in A-REIT prices during late 2007 reflects a re-rating of risk on the upside. The post credit crisis financial climate warrants a review of investment strategies; in particular, growth style investments that may be carrying a high level of embedded risk and opaque income streams. Findings – Current market sentiment suggests that investors have become more risk averse, and as such, will refocus on A-REITs that cater for defensive style investments. Such vehicles will have low to moderate gearing levels, hold quality property assets in their portfolio, limited off-shore exposure, and employ sound management practices. Originality/value – The heightened risk-averse environment presents opportunities for new investment products that provide partial exposure to direct property investment as a way to mitigate excessive equity market volatility.

Correlation structure of real estate markets over time : Table of Contents

Felix Schindler — Mon Oct 05 11:22:02 BST 2009

Abstract:
Purpose – The purpose of this paper is to examine the time-varying correlation structure of international real estate stock markets and its implications for portfolio management. Design/methodology/approach – The analysis focuses on real estate markets only and examines the appropriateness of the Markowitz approach based on mean-variance-optimization. Therefore, the properties of the return distributions are analyzed first. Afterwards, the stability of the correlation and covariance structure over time is analyzed and statistically tested by the Jennrich test. Findings – Because of low correlation among real estate markets worldwide there exists diversification benefits from broadening the investment horizon to international real estate markets. However, using correlation coefficients as a measure for diversification benefits is limited by empirical findings: Returns are not normally distributed, correlations increase in downward moving phases and neither the correlation nor the covariance structures are statistically stable over time. Therefore, mean-variance optimization is inherent with misleading results. Originality/value – The study provides some interesting and valuable insights into the correlation structure of real estate stock markets over time and the limitations for portfolio management based on mean-variance-optimization.

REITs, the stock market and economic activity : Table of Contents

Nikiforos Laopodis — Mon Oct 05 11:22:02 BST 2009

Abstract:
Purpose – The purpose of this paper is to investigate the linkages among real estate investment trusts (REITs), the stock market, and real economic activity for the USA for the 1971-2007 period. In view of the fact that when the economy performs well the equity and REIT markets also do well, it is easy to see why one needs to examine the dynamic interactions among these magnitudes and understand the implications of market movements or policy changes on the returns of REIT. Design/methodology/approach – The empirical investigation is conducted via the vector autoregressive (VAR) methodology coupled with Granger causality and cointegration analyses. VAR analysis permits inferences to be drawn about how a particular variable, say, the stock market, helps to explain a REIT's return and to see how a shock from the same variable affects that return. In other words, the magnitudes which are more relevant in explaining the REIT return can be deduced so as to determine the driving forces behind the return. Finally, some robustness tests are performed and some other relative magnitudes are experimented with so as to have a more comprehensive picture of the dynamic interactions among the three variables. Findings – First, the equity and the mortgage REIT categories display essentially similar patterns with their interactions with the general stock market and/or industrial production movements. Specifically, in the case of the equity REIT, it is revealed that a reciprocal linkage between the two exists, whereas for the mortgage REIT a uni-directional one run from the REIT to the stock market. Second, when substituting the general stock market returns with two sub index returns (the small- and the mid-cap excess returns) it is found that the two REIT categories are more closely related to a sub index than the general stock market index. Overall, significant short-run interactions are seen among the three magnitudes since the 1970s. Originality/value – The results are important for investors and policymakers. For investors, the finding of the close relationship between the equity and mortgage REIT categories and the general stock market is that there may not be a profitable reallocation of portfolios within these two asset classes. For policymakers, it can be suggested that they take notice of how changes in monetary policy (via changes in interest rates or money supply) influence REIT investments and what the impact of that would be on the reallocation of such investments by professional investors and managers.