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The Other Side of Value: The Effect of Quality on Price and Return in Real Estate

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  • Sara Kelly Anzinger

    (S.K.Anzinger Consulting)

  • Chinmoy Ghosh

    (University of Connecticut)

  • Milena Petrova

    (Syracuse University)

Abstract

We examine the effect of quality on price and return in real estate. Quality real estate stocks generally trade at higher prices. However, similar to findings in the aggregate stock market (Asness et al. 2013), quality in listed real estate is not fully reflected in price. A long quality, short junk portfolio (QMJ) is found to produce average risk-adjusted returns of 3.6 % per quarter (14.4 % annually). QMJ has a significantly positive coefficient when added as a dependent variable to a 4-factor model explaining U.S. real estate excess returns, including market, size, value and momentum factors, and leads to a small improvement in the overall fit of the model. Further investigation of the components of quality shows that profitability has a consistently positive relationship with real estate excess returns, while higher dividend payout is consistently associated with lower returns, in contrast to findings for conventional firms.

Suggested Citation

  • Sara Kelly Anzinger & Chinmoy Ghosh & Milena Petrova, 2017. "The Other Side of Value: The Effect of Quality on Price and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 54(3), pages 429-457, April.
    • Handle: RePEc:kap:jrefec:v:54:y:2017:i:3:d:10.1007_s11146-016-9574-z
    DOI: 10.1007/s11146-016-9574-z
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    1. Jianfu Shen, 2021. "Distress Risk and Stock Returns on Equity REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 62(3), pages 455-480, April.
    2. Massimo Guidolin & Manuela Pedio, 2019. "How Smart is the Real Estate Smart Beta? Evidence from Optimal Style Factor Strategies for REITs," BAFFI CAREFIN Working Papers 19117, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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