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Commercial Real Estate Valuation: Fundamentals Versus Investor Sentiment

  • Jim Clayton

    ()

  • David Ling

    ()

  • Andy Naranjo

    ()

Registered author(s):

    This paper investigates the role of fundamentals and investor sentiment in commercial real estate valuation. In real estate markets, heterogeneous properties trade in illiquid, highly segmented and informationally inefficient local markets. Moreover, the inability to short sell private real estate restricts the ability of sophisticated traders to enter the market and eliminate mispricing. These characteristics would seem to render private real estate markets highly susceptible to sentiment-induced mispricing. Using error correction models to carefully model potential lags in the adjustment process, this paper extends previous work on cap rate dynamics by examining the extent to which fundamentals and investor sentiment help to explain the time-series variation in national-level cap rates. We find evidence that investor sentiment impacts pricing, even after controlling for changes in expected rental growth, equity risk premiums, T-bond yields, and lagged adjustments from long run equilibrium. Copyright Springer Science+Business Media, LLC 2009

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    File URL: http://hdl.handle.net/10.1007/s11146-008-9130-6
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    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 38 (2009)
    Issue (Month): 1 (January)
    Pages: 5-37

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    Handle: RePEc:kap:jrefec:v:38:y:2009:i:1:p:5-37
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102945

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    1. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
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    12. Ling, David & Naranjo, Jeffrey Fisher & A. & Fisher, Jeffrey & Naranjo, Andy, 2007. "Commercial Real Estate Return Cycles: Do Capital Flows Matter?," ERES eres2007_215, European Real Estate Society (ERES).
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    18. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
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    21. David Ling & Andy Naranjo, 2006. "Dedicated REIT Mutual Fund Flows and REIT Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 409-433, June.
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    23. David Ling & Andy Naranjo, 2003. "The Dynamics of REIT Capital Flows and Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 405-434, 09.
    24. Geltner, David & Mei, Jianping, 1995. "The Present Value Model with Time-Varying Discount Rates: Implications for Commercial Property Valuation and Investment Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 119-35, September.
    25. Alberto Plazzi & Walter Torous & Rossen Valkanov, 2008. "The Cross-Sectional Dispersion of Commercial Real Estate Returns and Rent Growth: Time Variation and Economic Fluctuations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 403-439, 09.
    26. Patric H. Hendershott & Bryan D. MacGregor, 2005. "Investor Rationality: An Analysis of NCREIF Commercial Property Data," Journal of Real Estate Research, American Real Estate Society, vol. 27(4), pages 445-475.
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