Re-thinking Commercial Real Estate Market Segmentation
AbstractInvestments in direct real estate are inherently difficult to segment compared to other asset classes due to the complex and heterogeneous nature of the asset. The most common segmentation in real estate investment analysis relies on property sector and geographical region. In this paper, we compare the predictive power of existing industry classifications with a new type of segmentation using cluster analysis on a number of relevant property attributes including the equivalent yield and size of the property as well as information on lease terms, number of tenants and tenant concentration. The new segments are shown to be distinct and relatively stable over time. In a second stage of the analysis, we test whether the newly generated segments are able to better predict the resulting financial performance of the assets than the old dichotomous segments. Applying both discriminant and neural network analysis we find mixed evidence for this hypothesis. Overall, we conclude from our analysis that each of the two approaches to segmenting the market has its strengths and weaknesses so that both might be applied gainfully in real estate investment analysis and fund management.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2010-12.
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market segmentation; commercial real estate; financial performance measurement; cluster analysis; neural network analysis; risk diversification;
Find related papers by JEL classification:
- C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
- D4 - Microeconomics - - Market Structure and Pricing
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
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- Hoesli, M. & Lizieri, C. & Macgregor, B., 1996.
"The Spatial Dimensions of the Investment preformance of UK Commercial Property,"
96.14, Ecole des Hautes Etudes Commerciales, Universite de Geneve-.
- Martin Hoesli & Colin Lizieri & Bryan MacGregor, 1997. "The Spatial Dimensions of the Investment Performance of UK Commercial Property," Urban Studies, Urban Studies Journal Limited, vol. 34(9), pages 1475-1494, August.
- Steven Devaney & Colin Lizieri, 2005. "Individual Assets, Market Structure And The Drivers Of Return," Real Estate & Planning Working Papers rep-wp2005-18, Henley Business School, Reading University.
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