In his keynote speech, Professor Jacob Sagi from the University of Northern Carolina at Chapel Hill addressed the latest developments in research on real estate asset pricing for capital investments in commercial real estate. In the first part of his presentation, Professor Sagi focused on the pricing of individual properties, presenting an approach for a model that takes into account search costs, random matching of supply and demand, and the typically low liquidity of the real estate market. The second part of his presentation was devoted to the topic of price and risk modelling in the context of portfolios. He pointed out that determining market beta for real estate portfolios is hardly possible because real estate is not traded regularly, and the commonly used indices to reflect market prices do not have the necessary statistical characteristics. Professor Sagi therefore developed an alternative approach for determining the impact of macroeconomic risks on the pricing of real estate portfolios, taking into account economic, inflation, and interest rate risks.
Research papers on current problems of real estate asset pricing
Twelve research papers were presented in the course of the ReCapNet conference, which discussed the following questions, among others:
- Is the risk of Real Estate Investment Trusts (REITs) concentrating spatially on certain regions in their investment properties rewarded in terms of future returns?
The study showed that REITs with a stronger spatial concentration generate, on average, a higher return than REITs with a broader geographical diversification.
- Are there special asset pricing models that better explain the share prices of real estate companies than the standard asset pricing models?
The Fama-French model, extended by a momentum factor, is the standard model for the explanation of stock returns and price risks. In the study presented, this model was extended by a factor that reflects the spatial distance of investments by real estate companies (most of them REITs). As a significant explanatory factor the spatial distance should be considered when measuring risk, in addition to the factors of the standard model.
- How strong is the influence of regional and local factors on real estate prices?
A study on the US housing market showed that the influence of regional and local factors on prices is less pronounced than previously assumed. Only in 39 of 179 US metropolitan regions do local risk factors have a significant impact on the formation of house prices. Conversely, the impact of US-wide risk factors on the housing market appears to be higher than previously thought. Moreover, there is no significant correlation between house prices and share prices; real estate thus significantly contributes to increasing the risk diversification of equity portfolios.
ReCapNet conference offers opportunity for scientific exchange
This year’s conference again offered the opportunity for an in-depth scientific exchange and discussion of the latest research results from the established research network at ZEW. The concept of the conference – concentrating on current research topics from 30 to 40 selected international participants working at the intersection of real estate and capital markets – has proven successful. The next ReCapNet conference is scheduled to take place on 12 and 13 November 2020 and will focus on real estate markets and their interaction with global trends such as urbanisation and demographic change. The corresponding call for papers will be published in spring 2020.