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Market Fundamentals, Risk and the Canadian Property Cycle: Implications for Property Valuation and Investment Decisions

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Author Info
Jim Clayton (Department of Finance and Management Science Saint Mary's University Halifax, Nova Scotia Canada B3H 3C3)
Abstract

The dramatic decline in commercial property values in recent years has changed popular perception about real estate investment risk. This paper aims to generate new insights into real estate investment risk and its implications for real estate valuation. It shows that the risk premium on unsecuritized commercial real estate varies over time and is strongly related to general economic conditions. A vector autoregressive model developed to forecast real estate returns reveals that time variation in real estate risk is partly predictable, and thus can help us to forecast future movements in commercial property values. The analysis suggests that in periods surrounding major market movements, changes in commercial property prices are driven more by changes in expected (required) returns than by changes in current and expected future property income. Changing expected returns may reflect rational revisions of real estate investment risk, or alternatively investor psychology or sentiment.

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File URL: http://cbeweb-1.fullerton.edu/finance/journal/papers/pdf/past/vol12n03/v12p347.pdf
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Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 12 (1996)
Issue (Month): 3 ()
Pages: 347-368
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Handle: RePEc:jre:issued:v:12:n:3:1996:p:347-368

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Postal: American Real Estate Society College of Business & Public Administration Florida Atlantic University MacArthur Campus, 5353 Parkside Drive Jupiter FL 33458
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Web page: http://www.aresnet.org/

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Postal: Donna Cooper American Real Estate Society College of Business & Public Administration Florida Atlantic University MacArthur Campus, 5353 Parkside Drive Jupiter FL 33458
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Web: http://cbeweb-1.fullerton.edu/finance/journal/about/get.htm

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L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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  1. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June. [Downloadable!] (restricted)
  2. John Y. Campbell & Robert J. Shiller, 1989. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June. [Downloadable!] (restricted)
    Other versions:
  4. Joseph Gyourko & Donald B. Keim, . "What Does the Stock Market Tell Us About Real Estate Returns? (Revision of 18-91) (Reprint 030)," Rodney L. White Center for Financial Research Working Papers 11-92, Wharton School Rodney L. White Center for Financial Research.
  5. Fisher, Jeffrey D & Geltner, David M & Webb, R Brian, 1994. "Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods," The Journal of Real Estate Finance and Economics, Springer, vol. 9(2), pages 137-64, September.
  6. David M. Geltner, 1993. "Estimating Market Values from Appraised Values without Assuming an Efficient Market," Journal of Real Estate Research, American Real Estate Society, vol. 8(3), pages 325-346. [Downloadable!]
  7. Waldo L. Born & Stephen A. Pyhrr, 1994. "Real Estate Valuation: The Effect of Market and Property Cycles," Journal of Real Estate Research, American Real Estate Society, vol. 9(4), pages 455-486. [Downloadable!]
  8. Geltner, David & Mei, Jianping, 1995. "The Present Value Model with Time-Varying Discount Rates: Implications for Commercial Property Valuation and Investment Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 119-35, September.
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