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Investor Rationality: Evidence from UK Property Capitalization Rates

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  • Patric H. Hendershott
  • Bryan D. MacGregor

Abstract

Recent analyses have suggested the irrationality of investors in Australian and U.S. office properties. More specifically, investors have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this paper we analyze the determination of UK office and retail capitalization rates and provide evidence that these rates reflect rational expectations of mean reversion in future real cash flows. Moreover, these rates are linked to capitalization rates (dividend/price ratio) and expected dividend earnings growth as expected.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9894.

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Date of creation: Aug 2003
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Publication status: published as Hendershott, Patric H. and Bryan D. MacGregor. "Investor Rationality: An Analysis Of NCREIF Commercial Property Data," Journal of Real Estate Research, 2005, v27(4,Oct/Dec), 445-471.
Handle: RePEc:nbr:nberwo:9894

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  1. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
  2. Brent W. Ambrose & Hugh O. Nourse, 1993. "Factors Influencing Capitalization Rates," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 8(2), pages 221-238.
  3. Hendershott, Patric H, 2000. "Property Asset Bubbles: Evidence from the Sydney Office Market," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 20(1), pages 67-81, January.
  4. Timothy W. Viezer, 1999. "Econometric Integration of Real Estate's Space and Capital Markets," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 18(3), pages 503-519.
  5. Sivitanidou, Rena & Sivitanides, Petros, 1999. "Office Capitalization Rates: Real Estate and Capital Market Influences," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 18(3), pages 297-322, May.
  6. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
  7. 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, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
  8. Quan, Daniel C & Quigley, John M, 1991. "Price Formation and the Appraisal Function in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 4(2), pages 127-46, June.
  9. Robert E. Hall, 2001. "Struggling to Understand the Stock Market," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 1-11, May.
  10. Hendershott, Patric H., 1996. "Rental Adjustment and Valuation in Overbuilt Markets: Evidence from the Sydney Office Market," Journal of Urban Economics, Elsevier, vol. 39(1), pages 51-67, January.
  11. Richard D. Evans, 1990. "A Transfer Function Analysis of Real Estate Capitalization Rates," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 5(3), pages 371-380.
  12. G. Donald Jud & Daniel T. Winkler, 1995. "The Capitalization Rate of Commercial Properties and Market Returns," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 10(5), pages 509-518.
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Cited by:
  1. Serguei Chervachidze & William Wheaton, 2013. "What Determined the Great Cap Rate Compression of 2000–2007, and the Dramatic Reversal During the 2008–2009 Financial Crisis?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(2), pages 208-231, February.
  2. Alexandra Krystalogianni & Sotiris Tsolacos, 2005. "Regime switching in yield structures and real estate investment," Journal of Property Research, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(4), pages 279-299, May.
  3. Patric Hendershott & Maarten Jennen & Bryan MacGregor, 2013. "Modeling Space Market Dynamics: An Illustration Using Panel Data for US Retail," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 47(4), pages 659-687, November.

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