1 / 20

RETURN OF REIT AND EXPECTED INCOME GROWTH OF REAL ESTATE ASSET

RETURN OF REIT AND EXPECTED INCOME GROWTH OF REAL ESTATE ASSET. Sherry Y.S. Xu Department of Real Estate and Construction Faculty of Architecture The University of Hong Kong. RESEARCH QUESTIONS. Is there relationship between REITs and real estate market?

shepry
Download Presentation

RETURN OF REIT AND EXPECTED INCOME GROWTH OF REAL ESTATE ASSET

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. RETURN OF REIT AND EXPECTED INCOME GROWTH OF REAL ESTATE ASSET Sherry Y.S. Xu Department of Real Estate and Construction Faculty of Architecture The University of Hong Kong

  2. RESEARCH QUESTIONS • Is there relationship between REITs and real estate market? • Which elements of the two markets can be linked? • How would these elements relate to each other?

  3. PROPOSITIONS • As the underlying portfolio of REIT, the real estate asset would has certain relations to its return. • Though actual rent growth cannot reflect the return of REIT, it would have dependence on the expected rent growth of underlying real estate assets.

  4. RESEARCH OBJECTIVES • Dependent variable: total return of REITs • Independent variables: 1) stock market factor ---- stock market price index 2) economic factor ---- real interest rate 3) real estate market factor ---- expected income (rent) growth of real estate asset

  5. what is expected income growth? The expected income growth can be defined as the rate at which the cash-flow of certain asset will grow over a period of time For real estate asset, the expected income growth can be regarded as the rent growth of the property in the investors’ expectation.

  6. where does expected income growth come from? • DCF Model first formally expressed in Fisher (1930) and Williams (1938)’s work • Gordon Growth Model • a variant of DCF model was derived by Gordon (1959) Here, P, D, g, k represent the asset’s value, income, expected income growth and required return rate respectively.

  7. what is expected income growth usually used for? • Evaluation of the asset’s price • Prediction of the asset’s return *in most of the previous research, the assets are almost stocks, REITs and real estate assets. Several very important relationships: price expected income growth Income yield expected return

  8. Previous literatures on the application of expected income growth Some of the recent research adopting expected income growth

  9. What are the common methods to get the expected income growth the conventional estimating method : VAR model (Vector Auto Regressive) (first applied in Campbell and Shiller (1988a,b)’s research) based on different datasets • historical income growths • 2) historical income yields

  10. Previous literatures making estimation of expected income (dividend) growth Some of the recent research estimating expected income growth

  11. Why to construct a new model 1) VAR model can be a good forecasting model, but in a sense it is an atheoretical model. 2)The problem of the predictability of the expected income growth.

  12. Deviation of the new model Based on Gordon Growth Model, we further assume that the required rate of return (i) would change with constant growth (G) as well, then we get the variant of GGM: (1) Here, P = price of asset, D = income of asset, g=expected income growth, i=required rate of return, G = the growth of required rate of return

  13. How to find out growth of required rate of return Required rate of return (i) = cost of capital = risk-free return rate =yield of government bond is equal to growth of i growth of bond yield spread of bond yield (S) = longest-period bond yield (iL) – shortest-period bond yield (i0) (2)

  14. the expected income growth model Combining equation (1) and (2), we can get the model for capturing the expected income growth of certain asset as followed: Solving the function above with Newton-Raphson Method, the expected income growth of asset (g) can be calculated

  15. Study in Hong Kong market Source: Rating and Valuation Department, Hong Kong SAR & Hong Kong Monetary Authority

  16. Study in Hong Kong market (continued) Source: Rating and Valuation Department, Hong Kong SAR & Hong Kong Monetary Authority

  17. EMPIRICAL TEST • Empirical model: Here, Rit and ERGit refer to the total return and weighted expected income growth of certain portfolio of the ith REIT at time t respectively; HSIt, INTt, INFt represent the Hang Seng Index, Interest rate and Inflation rate in Hong Kong at time t respectively.

  18. EMPIRICAL TEST (continued) • Empirical results: • Return of all REITs in Hong Kong show strong positive dependence on the stock market factor; • Three of them show significant negative relationship with real interest rate; • One of them shows significant positive dependence on the expected rent growth of its underlying real estate asset.

  19. Conclusions The contributions of this study: • combining the government bond market with asset market to find out the change of time value of the money; • capturing the expected income growth based on a mathematical model other than forecasting investigation or econometrics model; • finding out the relationship between REITs market and direct real estate market.

  20. References • ANG, A. & BEKAERT, G. (2007) Stock Return Predictability: Is it There? Review of Financial Studies, 20, 57. • ANG, A. & LIU, J. (2007) Risk, return, and dividends. The Journal of Financial Economics, 85, 38. • BANSAL, R. & YARON, A. (2004) Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles. Journal of Finance, 59, 29. • CAMPBELL, J. Y. (1991) A Variance Decomposition for Stock Returns. The Economic Journal, 101, 23. • CAMPBELL, J. Y. & SHILLER, R. J. (1988a) The dividend-price ratio, and expectations of future dividends and discount factors. The Review of Financial Studies, 1, 34. • CAMPBELL, J. Y. & SHILLER, R. J. (1988b) Stock prices, earnings, and expected dividends. Journal of Finance, 43, 16. • CAMPBELL, J. Y. & YOGO, M. (2006) Efficient tests of stock return predictability. Journal of Financial Economics, 81, 34. • CHEN, J., HUDSON-WILSON, S. & NORDBY, H. (2004) Real Estate Pricing: Spreads & Sensibilities: Why Real Estate Pricing Is Rational. Journal of Real Estate Portfolio Management, 10, 21. • CHIANG, K. C. H. (2008) High dividend yield does predict lower dividend growth: a natural experiment. Burlington, University of Vermont. • FAIR, R. C. & SHILLER, R. J. (1990) Comparing information in forecasts from econometrics models. The American Economic Review, 80, 15. • FAMA, E. F. (1990) Stock Returns, Expected Returns, and Real Activity. The Journal of Finance, 45, 20. • FAMA, E. F. & FRENCH, K. R. (1988) Dividend yields and expected stock returns. Journal of Financial Economics, 22, 19. • FAMA, E. F. & FRENCH, K. R. (2001) Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60, 41. • FISHER, I. (1930) The Theory of Interest as Determined by Impatience to Spend Income and Opportunity to Invest it, New York, The Macmillan Company. • GORDON, M. J. (1959) Dividends, Earnings and Stock Prices. Review of Economics and Statistics 41, 99--105. • HODRICK, R. J. (1992) Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement. the Review of Financial Studies, 5, 30. • HUNG, S.-Y. K. & GLASCOCK, J. L. (2008) Momentum Profitability and Market Trend: Evidence from REITs Journal of Real Estate Finance and Economics, 37, 19. • JOHNSON, T. C. (2002) Rational momentum effects. Journal of Finance, 57, 24. • KEIM, D. B. & STAMBAUGH, R. F. (1986) Predicting returns in the stock and bond markets. The Journal of Financial Economics, 17, 34. • KOTHARI, S. P. & SHANKEN, J. (1992) Stock return variation and expected dividends : A time-series and cross-sectional analysis. Journal of Financial Economics, 31, 34. • KOTHARI, S. P. & SHANKEN, J. (1997) Book-to-market, dividend yield, and expected market returns: a time-series analysis. Journal of Financial Economics, 44, 35. • LETTAU, M. & LUDVIGSON, S. C. (2005) Expected returns and expected dividend growth. Journal of Financial Economics, 76, 44. • MENZLY, L., SANTOS, T. & VERONESI, P. (2004) Understanding Predictability The Journal of Political Economy, 112, 47. • PLAZZI, A., TOROUS, W. & VALKANOV, R. (2004) Expected Return and the Expected Growth in Rents of Commercial Real Estate. Los Angeles, UCLA. • PLAZZI, A., TOROUS, W. & VALKANOV, R. (2008) The cross-sectional dispersion of commercial real estate returns and rent growth: time variation and economic fluctuations. Real Estate Economics, 36, 37. • POTERBA, J. M. & SUMMERS, L. H. (1988) Mean reversion in stock prices : Evidence and Implications. The Journal of Financial Economics, 22, 33. • ROZEFF, M. S. (1984) Dividend Yields Are Equity Risk Premiums. Journal of Portfolio Management, 11, 8. • SCHWERT, G. W. (1990) Stock Returns and Real Activity: A Century of Evidence The Journal of Finance, 45, 21. • SHILLING, J. D. & SING, T. F. (2007) Do institutional real estate investors have rational expectations. Asian Real Estate Society Conference. Macau, AsRES. • SING, T. F., DENG, L. & WANG, H. (2007) Tests of common real estate risk premia in a time-varying expected return framework. Journal of Property Investment & Finance, 25, 11. • WILLIAMS, J. B. (1938) The Theory of Investment Value, Harvard University Press.

More Related