To Hold or Not to Hold? The Development of Holding Period Length Across Several European Markets

Finance literature on holding periods suggests that illiquidity and high transaction costs can lead to longer holding periods while return volatility leads to shorter holding periods. Since real estate is a very illiquid asset with high transaction costs, holding periods tend to be longer and strongly linked to performance with the risk of underperformance higher over shorter investment horizons. Several market observers claim that holding periods have been decreasing over the past decades. Ceteris paribus that would imply deteriorating performance. However, shorter holding periods could also be explained by decreasing transaction costs, increasing return volatility or other factors.This paper is going to analyze and compare the development in holding periods for several European real estate markets. While a comparison between different countries will be carried out, the main focus will be on the UK market for which the longest time series is available.A regression model is used in an effort to quantify the impact of increasing transaction costs, in particular taxes, on holding period length in order to determine how changes in legislature affect the market. Finally insights gained from the link between holding periods and investment performance can provide useful guidelines for portfolio managers.Data on sale and purchase dates, transaction costs and individual property performance for several countries is supplied by IPD Investment Property Databank. A preliminary analysis suggests that average holding periods and deviations from the mean differ substantially between countries. The Netherlands seem to have had the longest average holding period with the largest standard deviation. The shortest average holding period could be found in Sweden while France had the smallest deviation of holding periods. Data for the UK is still pending.