Business models of real estate equity companies and capital market volatility

The analysis of price fluctuations of real estate equity companies he been approached from different perspectives, such as region, investment type or regional focus. However, the capital market volatility of different business models of real estate equity companies has not been investigated so far. The aim of this paper is to gain a better understanding of how real estate equity companies’ business models can be quantified and distinguished in the first place. We use real estate equity companies´ turnover along the two dimensions “area of economic activity” and “asset class” to distinguish between business models and to quantify turnover fragmentation. How the fragmentation of each dimension impacts the capital market volatility is relevant for our understanding of how diversification is valued by capital markets. Additionally, different business models and associated stocks might respond differently to varying market phases and external shocks. An analysis of these reactions is therefore a research objective with potentially interesting insights in terms of resiliency during crisis such as the Covid-19 pandemic. Our analysis is based on a sample of 48 real estate equity companies from Germany and Austria from Q1/2016 up until Q3/2022 with a total market capitalization of €89bn. The turnover data was collected by analyzing the business reports and in a survey among the companies in 2022. We use hierarchical clustering after Ward (1963) and a silhouette index to derive compact clusters of real estate equity companies sharing a comparable turnover structure, which can be interpreted as groups of business models. Based on those results we firstly analyze the fragmentation of each business model in terms of turnover fragmentation using the Hirschman-Herfindahl index and the relation between fragmentation and capital market volatility. Secondly, we construct a stock market index for each business model and investigate the first and second moment as well as the correlations with macroeconomic variables and sentiment indicators. Thirdly, the indices are subjected to a change point analysis based on the Pruned Exact Linear Time (PELT) method to identify breaks in the volatility of the return series. From here the individual time frames of each index based on the identified breaks are subjected to analysis and specifically the pandemic period. In addition to a better understanding of the complexity and fragmentation of the business models pursued by real estate equity companies and their impact on capital market volatility, this paper provides a basis for a systematic benchmarking approach for investors and regulators based on the identified groups of business models, as well as a better understanding of the resiliency of different business models during different market phases.