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Rental Expectations and the Term Structure of Lease Rates

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Author Info
Clapham, Eric () (Stockholm School of Economics)
Gunnelin, Åke () (Swedish Institute for Financial Research)
Abstract

We consider the term structure of lease rates in a general setting where both the interest rate and the short rent are stochastic. Our framework is applicable to any leasing market, but we focus on real estate. We find that the “expectations hypothesis” of lease rates, i.e. that the forward rent is an unbiased estimator of the future short rent, requires similar assumptions as in interest rate theory to hold. To study the magnitude of the bias we parameterize our general framework. The simulations show that different realistic parameter values for risk aversion and interest rate stochastics can generate widely different shapes of the rental term structure, holding the objective rental expectations constant. As a result, an expected increase in rent may very well be consistent with a downward-sloping term structure and vice versa.

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Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 16.

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Length: 26 pages
Date of creation: 13 Oct 2003
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Handle: RePEc:hhs:sifrwp:0016

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Related research
Keywords: Term structure of lease rates; Rental expectations; Expectations hypothesis; Lease valuation;

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Find related papers by JEL classification:
G00 - Financial Economics - - General - - - General
R00 - Urban, Rural, and Regional Economics - - General - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September. [Downloadable!] (restricted)
  2. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July. [Downloadable!] (restricted)
  3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November. [Downloadable!] (restricted)
  4. Miller, Merton H & Upton, Charles W, 1976. "Leasing, Buying, and the Cost of Capital Services," Journal of Finance, American Finance Association, vol. 31(3), pages 761-86, June. [Downloadable!] (restricted)
  5. Gunnelin, Åke & Söderberg, Bo, 2002. "Term Structures in the Office Rental Market in Stockholm," SIFR Research Report Series 6, Institute for Financial Research. [Downloadable!]
  6. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August. [Downloadable!] (restricted)
  7. Peter ENGLUND & Åke GUNNELIN & Martin HOESLI & Bo SÖDERBERG, 2002. "Implicit Forward Rents as Predictors of Future Rents," FAME Research Paper Series rp59, International Center for Financial Asset Management and Engineering. [Downloadable!]
  8. Lo, Andrew W & Wang, Jiang, 1995. " Implementing Option Pricing Models When Asset Returns Are Predictable," Journal of Finance, American Finance Association, vol. 50(1), pages 87-129, March. [Downloadable!] (restricted)
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  9. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387. [Downloadable!] (restricted)
  10. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September. [Downloadable!] (restricted)
  11. Miceli, Thomas J. & Sirmans, C. F., 1999. "Tenant Turnover, Rental Contracts, and Self-Selection," Journal of Housing Economics, Elsevier, vol. 8(4), pages 301-311, December. [Downloadable!] (restricted)
  12. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn. [Downloadable!] (restricted)
  13. Grenadier, Steven R., 1996. "Leasing and credit risk," Journal of Financial Economics, Elsevier, vol. 42(3), pages 333-364, November. [Downloadable!] (restricted)
  14. Englund, Peter & Gunnelin, Åke & Hoesli, Martin & Söderberg, Bo, 2002. "Implicit Forward Rents as Predictors of Future Rents," SIFR Research Report Series 12, Institute for Financial Research. [Downloadable!]
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  1. Shaun Bond & Pavlos Loizou & Patrick McAllister, 2008. "Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?," The Journal of Real Estate Finance and Economics, Springer, vol. 36(4), pages 451-469, May. [Downloadable!] (restricted)
  2. Brent Ambrose & Yildiray Yildirim, 2008. "Credit Risk and the Term Structure of Lease Rates: A Reduced Form Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 37(3), pages 281-298, October. [Downloadable!] (restricted)
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