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Microstructure of asset prices, property income and discount rates in the Tokyo residential market
Abstract
Purpose
The purpose of this paper is to decompose and measure the microstructure of property investment returns for Tokyo’s residential property markets in as much detail as possible in comparison with office market.
Design/methodology/approach
Using enterprise value data for property investment trust companies composed of share prices available on capital markets, this study proposed a method of estimating property investment returns corresponding to changes in capital markets, and clarified the distortion in capitalization rate that are formed based on property appraisal prices.
Findings
The results for residential property showed that as building floor space increased, income and price increased while the discount rate decreased. In particular, a higher return could be obtained from office property than residential property by investing in larger-scale properties. Building age lowered asset price and income for both residential and office property, especially for residential property.
Research limitations/implications
In Japan, investors believe that investment returns are high for properties close to the city centre, relatively new properties and those with large design or floor space. Therefore, this study first measured how asset prices, income and asset price–income ratios that comprise property investment returns change based on differences in these property characteristics. Second, the reliability/distortion of information that can be observed on the property investment market was measured. Furthermore, there was a significant divergence between discount rates and risk premiums formed by asset or space markets versus capital markets.
Practical implications
The differences of discount rate and risk premium formed by asset markets versus capital markets indicate that appraisal prices have biases. Thus, when it comes to property investment decisions, it is essential to make active use not just of property investment returns based on appraisal prices formed by asset markets but also information formed by capital markets.
Social implications
A greater difference was generated in a shrinking market, suggesting that analysing property returns estimated on asset market information alone could lead to erroneous investment decisions.
Originality/value
This research is the first to use the enterprise value data from real estate investment trust companies composed of share prices available on capital markets for calculating discount rate and risk premium in property market.
... 7 See Case and Quigley (1991) and Ekeland et al. (2004). 8 See Diewert (2003a, b). 9 See , Giaccotto (1992, 1998), Shimizu andNishimura (2006, 2007) and . 10 See Bourassa et al. (2006). ...
... Geltner (1997) also used real estate prices determined by the stock market in order to examine the smoothing effects of the use of appraisal prices. Finally, Geltner et al. (2010), Shimizu et al. (2015), Shimizu (2016) and Diewert and Shimizu (2017Shimizu ( , 2019 proposed various estimation methods for commercial property price indexes using REIT data. ...
How can a commercial property price index (CPPI) be defined and constructed? And what kind of relationship does the measurement of commercial property’s value have to the System of National Accounts and to concerns about national financial sectors? In order to answer such questions, this paper aims to outline the concepts that can be used to define and measure the value of commercial property, and to clarify the relationship of such measurement to the System of National Accounts and to the financial system.
... Others make international comparative analyses of the performances and critical success factors of unit trusts among different countries, such as the UK, Malaysia, Singapore, and South Africa (Tsaurai, 2015). In addition, the performance of REITs was studied (Sahin, 2005;Shimizu, 2017). Other financial studies focus on different misinformation correction strategies and their influence on investors' decisions and the performance of investment trusts (Yang 2020). ...
This study is a concise, systematic literature review of a legal instrument called the ‘trust’ in academic business research. Therefore, it aims to define the state-of-the-art and future research paths on this topic. Web of Science and Scopus are bibliographic databases used to collect data, and a rigorous and transparent methodological protocol has been used to conduct a systematic literature review. The study of bibliometric data and the content analysis of the research sample allow for insightful considerations, showing the main business areas dealing with trusts (the financial, historical, and corporate governance areas) and mapping the specific sub-topics of each one. Moreover, a new trend outlines the increasing interest in trusts and connected institutions (investment trusts, trust companies, unit trust funds, real estate investment trusts) from the traditional UK and US contexts to new emerging countries such as China, Malaysia, and South Africa. In conclusion, many gaps in the literature and opportunities for future business research are outlined. This study helps overcome the traditional juridical study perspective of trusts, showing many links with businesses and corporations and encouraging scholars to investigate the trusts in the business world.
... In other words, the market should be evaluated in such a way that the totals of real estate capital and REIT corporate debt and equity are consistent. However, combining the property-level and firm-level datasets of Japanese REITs, Shimizu (2017) and Shimizu et al. (2015) report that Tobin's Q exceeds 1 in a situation wherein the financial market overheats and show that the degree differs for each REIT corporation. ...
Real Estate Investment Trusts (REITs) renew and recycle their property portfolios through divestment of inefficient assets and new acquisitions. Most previous literature focuses on the wealth effect of acquisition on REIT-level performance, while the property-level renewal process of REIT portfolios (especially divestments) remains unclear. Using a unique property-level dataset of Japanese REITs, we fill this gap by investigating the determinants of property divestment and the management strategy leading up to the divestments. We find that REITs strategically choose properties designated for divestment. The criteria include: (i) economic obsolescence that is captured through relatively large operating expense and/or a high rental yield within the REIT portfolio, (ii) mismatch in the geographical focus of the REIT, and (iii) a significant change in the capital value since acquisition. Especially during the periods of REIT growth, most of the above criteria apply, suggesting that the long-run renewal of a portfolio leads to its efficient asset allocation. We also provide evidence of property-level earnings management by REITs: the size of the capital expenditure is reduced just before the divestment to increase the net cash flows to appeal to potential buyers.
... This literature includes: Cole, Guilkey and Miles (1986); Geltner, Graff and Young (1994); Geltner (1997Geltner ( , 1998 (2015) as examples of US studies indexes finding evidence of lagging, smoothing, and errors with regard to transaction-based CPPIs. Nishimura and Shimizu (2003), Shimizu and Nishimura (2006), and Shimizu, Nishimura and Watanabe (2012), Shimizu, Diewert, Nishimura and Watanabe (2013), Shimizu (2016) and Diewert and Shimizu (2017) compared transaction-based RPPIs and CPPIs with appraisal-based price indexes for Japan with similar findings. 7 Shimizu and Nishimura (2006) outline the very particular institutional and cultural factors adversely impacting on residential and commercial property price measurement in Japan. ...
Commercial property price indices (CPPIs) should be based on market transaction prices. Yet in monitoring average price changes over time price data can be sparse and the properties transacted each period of a different quality-mix. Due to the heterogeneity of commercial property, CPPI measurement requires a quality-mix adjustment so that the prices of like properties are compared over time with like. An appealing way around this sparse data and quality-mix adjustment problem is to use price data on broadly the same properties over time and avoid transaction price data. Tax or investment appraisal data or market valuations of real estate investment trusts (REITs) are two commonly used alternatives. While convenient, both such series can seriously mislead macroprudential and macroeconomic-policy makers. In this overview paper we point to the deficiencies of these data sources, outline and argue for the use of hedonic methods of quality-mix adjustment that are designed to work with sparse transaction price data in thin heterogeneous commercial property markets.
... Return expectations are anticipated level of return investors in the future, while the actual return is the rate of return has been obtained by investors in the past (Tjolleng and Manurung, 2013) Return on Investment (ROI). (Shimizu, 2017) Return on Investment as a measure of the ability of the company's overall profit for a total amount of assets available in the company. Fahmi (2014) Return on Investment expressed as the ratio used to see the extent of the investments made capable of delivering returns by the expected and the actual investment equal with invested assets of the company. ...
The purpose of this study is to test the hypothesis of the influence of independent variables namely ROI, ROE, EPS, DER, CSR while the dependent variable is Stock Return. This research approach is a fixed effect approach, general effects, and random effects approach. The sample used in this study was 19 Manufacturing Companies listed on the Indonesia Stock Exchange for the 2015-2018 period. The results showed that ROI, ROE, EPS, and DER partially did not affect Stock Return, while CSR partially affected stock returns on Manufacturing Companies listed on the Indonesia Stock Exchange for the 2015-2018 period. This means that the companies sampled in this study stated that CSR is a form of commitment in improving welfare through social and environmental responsibility, CSR also provides long-term benefits by increasing the company's reputation and branding, efficiency, internal party appreciation, and strong profitability.
The System of National Accounts (SNA) requires separate estimates for the land and structure components of a commercial property. Using transactions data for the sales of office buildings in Tokyo, a hedonic regression model (the “builder’s model”) was estimated and this model generated an overall property price index as well as subindexes for the land and structure components of the office buildings. The builder’s model was also estimated using appraisal data on office building real estate investment trusts (REITs) for Tokyo. These hedonic regression models also generated estimates for net depreciation rates, which can be compared. Finally, the Japanese government constructs annual official land prices for commercial properties based on appraised values. The paper compares these official land prices with the land prices generated by the hedonic regression models based on transactions data and on REIT data. The results reveal that commercial property indexes based on appraisal and assessment prices lag behind the indexes based on transaction prices.
The paper studies the problems associated with the construction of price indexes for commercial properties that could be used in the System of National Accounts. Property price indexes are required for the stocks of commercial properties in the balance sheets and related price indexes for the land and structure components of a commercial property are required in the balance sheet accounts for the calculation of the Multifactor Productivity of the Commercial Property Industry. The paper uses a variant of the builder's model that has been used to construct Residential Property Price Indexes. Geometric depreciation rates are estimated for commercial offices in Tokyo using assessment data for REIT. The problems associated with the decomposition of property value into land and structure components are addressed. The problems associated with depreciating capital expenditures on buildings and with measuring the loss of asset value due to early retirement of the structure are also addressed.
We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e. the discount rate) and the numerator (i.e. cash flows from properties) are estimated differs from the traditional method. We run a hedonic regression to estimate the quality adjusted discount rate based on the share prices of REITs, which can be regarded as the stock market’s valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated with all existing contracts, as well as rental prices associated with new rental contracts, which may contain more information on future cash flows from properties. Using a data-set with prices and cash flows for about 400 commercial properties included in Japanese REITs for the period 2001–2013, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the second quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.
Purpose
This paper seeks to investigate the nature and magnitude of the distortion in appraisal land price information according to change in the market, with a special focus on the Government's Published Land Prices.
Design/methodology/approach
In Japan, there is an item of land price information, so‐called Koji‐Chika (PLPS: Published Land Price Information System), that is a survey of fair market value by the qualified appraisers. The valuation error of this land price information was analyzed using the following method. First, hedonic price indices were constructed based on both actual transaction prices and the Published Land Prices, they were then compared to detect possible distortions in the governmental price information. Also the possibility of structural change in the Japanese real estate markets was studied and its effect on price indices was considered. Analysis of the Tokyo metropolitan area in Japan took place between 1975 and 1999
Findings
Large and systematic discrepancies between actual transaction prices and the Published Land Prices were identified, which might suggest that there are serious problems in the governmental information system. It is believed that it is necessary to consider this issue in the context of the entire real estate appraisal system in Japan.
Research limitations/implications
Limitations stem from the nature of Japanese data. Future research will seek to look at values on an IPD index.
Originality/value
The land market in Tokyo experienced a so‐called Bubble economy, and the rapid rise and fall of the land price were generated for this period.
Indexes of commercial property prices face much scarcer transactions data than housing indexes, yet the advent of tradable
derivatives on commercial property places a premium on both high frequency and accuracy of such indexes. The dilemma is that
with scarce data a low-frequency return index (such as annual) is necessary to accumulate enough sales data in each period.
This paper presents an approach to address this problem using a two-stage frequency conversion procedure, by first estimating
lower-frequency indexes staggered in time, and then applying a generalized inverse estimator to convert from lower to higher
frequency return series. The two-stage procedure can improve the accuracy of high-frequency indexes in scarce data environments.
In this paper the method is demonstrated and analyzed by application to empirical commercial property repeat-sales data.
KeywordsReal estate price indexes-Frequency-conversion-Transactions-based-index estimation-Derivatives-Noise filter
This paper considers the identification and estimation of hedonic models. We establish that in an additive version of the hedonic model, technology and preferences are generically nonparametrically identified from data on demand and supply in a single hedonic market. The empirical literature that claims that hedonic models estimated on data from a single market are fundamentally underidentified is based on arbitrary linearizations that do not use all the information in the model. The exact economic model that justifies linear approximations is unappealing. Nonlinearities are generic features of equilibrium in hedonic models and a fundamental and economically motivated source of identification.
A true constant quality real estate price index should measure the general change in price level free from any change in quality over time. In recent years, the repeat-sales method has been widely used to construct constant quality property price indices. Since buildings depreciate over time, a simple repeat-sales index would underestimate the growth in property prices. The major problem of controlling the effects of age constant in a repeat-sales model arises from the exact multicollinearity between the age variable and the time dummy variables. In this study, we derive a solution that is theoretically sound and practical by allowing the age effects to be non-linear. In case of leasehold properties, we further incorporated interest rates into the model because the effects of age on real estate prices depend theoretically on interest rates. A sample of residential units in Hong Kong sold more than once from Quarter 2 of 1991 to Quarter 1 of 2001 (more than 11,000 repeat sales pairs) are used for the empirical analysis. Copyright Springer Science + Business Media, Inc. 2005
This research examines the relationship between hedonically controlled housing price levels and subsequent changes in those prices across locations within MSAs. Are areas with a high price relative to an “imputed rent” paying for higher appreciation? In an efficient market ( e.g ., Gordon Growth Model), as fundamentals (impute rent) differ across locations and change over time, anticipation of these should generate a positive correlation between (residual) price levels and subsequent price changes.
We undertake these tests in four different MSAs using a panel of repeat‐sale house price indices that have been scaled to price levels with the hedonic attributes of the house and ZIP code. In three markets we find that identical houses in higher priced ZIP codes subsequently appreciate faster. In one market we find that there is little statistical difference.
The United Kingdom is well endowed with property indices, most of which are valuation based. Because valuers have incomplete information they tend to be influenced by past valuations of the subject property or past transaction prices of comparable properties. One result of this is that contemporaneous valuations may contain components of past market values, which induces a lagging and smoothing within an aggregate index. This paper demonstrates how the underlying market values may be recovered from a smoothed index, without assuming that the underlying property market is informationally efficient. The methodology is applied to the Jones Lang Wootton Index of capital values. The characteristics of the smoothed and unsmoothed indices are compared and some resulting implications about the optimal weighting of property in a multi‐asset portfolio are discussed. Our results support the hypothesis that British commercial property markets are ‘weak‐form’ efficient. Implications for optimal valuation procedures for valuing properties within an index are also discussed.
This study presents a methodology for exploiting the nonlinear hedonic nature of housing prices to estimate the compensated demands of households for particular housing attributes. The methodology is employed to provide Hicksian benefit measures of a particular housing subsidy program typical of those undertaken recently in developing countries.
Why was the Japanese consumer price index for rents so stable even during the period of the housing bubble in the 1980s? To address this question, we use a unique micro price dataset which we have compiled from individual listings (or transactions) in a widely circulated real estate advertisement magazine. This dataset contains more than 700,000 listings of housing rents over the last 20 years. We start from the analysis of microeconomic rigidity and then investigate its implications for aggregate price dynamics, closely following the empirical strategy proposed by Caballero (Caballero and Engel, 2007). We find that 90% of the units in our dataset had no change in rents per year, indicating that rent stickiness is three times as high as in the United States. We also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level, suggesting that rent adjustments are not state-dependent but time-dependent. These two results indicate that both the intensive and extensive margins of rent adjustments are small, resulting in a slow response of the CPI for rent to aggregate shocks. We show that the CPI inflation rate would have been higher by 1% point during the bubble period, and lower by more than 1% point during the period following the burst of the bubble, if Japanese housing rents were as flexible as those in the United States.
We investigate the salary returns to the ability to play football with both feet. The majority of footballers are predominantly right footed. Using two data sets, a cross-section of footballers in the five main European leagues and a panel of players in the German Bundesliga, we find robust evidence of a substantial salary premium for two-footed ability, even after controlling for available player performance measures. We assess how this premium varies across the salary distribution and by player position.
Using REIT return data, bond data, and property holding data, the authors construct property market segment-specific indices of asset returns. The authors show that these pure-play indices can be employed to make pure, targeted investments in the commercial real estate market while retaining the liquidity, transparency, and pricing efficiency benefits of the well-developed public market in REITs. These pure-play indices compare favorably with existing property market return indices, displaying volatilities similar to transaction-based indices, such as the Moody’s/REAL Commercial Property Price Index, but tending to lead the private market in time. The pure-play indices can be generated at a daily frequency without significant noise and at various levels of market segment granularity and, notably, have led the transactions-based direct property market indices during the recent market downturn. The authors’ findings suggest that the REIT-based pure-play indices may provide a unique, new information source about the commercial property market, as well as a unique capability to facilitate targeted investments, construct hedges, and potentially support derivatives trading.
The research agendas of psychologists and economists now have several overlaps, with behavioural economics providing theoretical and experimental study of the relationship between behaviour and choice, and hedonic psychology discussing appropriate measures of outcomes of choice in terms of overall utility or life satisfaction. Here we model the relationship between values (understood as principles guiding behaviour), choices and their final outcomes in terms of life satisfaction, and use data from the BHPS to assess whether our ideas on what is important in life (individual values) are broadly connected to what we experience as important in our lives (life satisfaction).
This paper estimates the systematic risk (or "beta") of unsecuritized investment grade commercial real estate, as represented by the FRC and PRISA indices of institutional real estate holdings. Systematic risk defined with respect to national consumption is compared to systematic risk defined with respect to the stock market. Also, the risk estimates are explicitly adjusted to account for "smoothing" in appraisal-based aggregate level returns data. The systematic risk of these real estate indices appears to be virtually zero with respect to the stock market, even after correcting for smoothing, but substantially positive with respect to national consumption. Copyright American Real Estate and Urban Economics Association.
I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
The authors derive, from a model of investment with multiple capital goods, a one-to-one relation between the growth rate of the capital aggregate and the stock-market-based Q. The authors estimate the growth-Q relation using a panel of Japanese manufacturing firms taking into account the endogeneity of Q. For early years of their sample, cash flow has significant explanatory power over and above Q. The estimated Q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment costs. Copyright 1991 by The Econometric Society.
"Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street," observed legendary speculator Jesse Livermore. History tells us that periods of major technological innovation are typically accompanied by speculative bubbles as economic agents overreact to genuine advancements in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation. On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. But on the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem.
Factors affecting capitalization rates in Hong Kong
- L C Ching