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The Term Premium of Cancellable Lease Rates

In: Housing Markets and Household Behavior in Japan

Author

Listed:
  • Miki Seko

    (Musashino University)

Abstract

The rent term premium for leasesRent term premium that can be cancelled by the lessee is analyzed. A model for the lessor’s trade-off between leasing costsLeasing cost and the cost of cancellation optionsCancellation option based on the recognition that many leases are cancellable by lessees and that lease markets involve significant transaction costsTransaction costs is developed. It is shown that, regardless of the expected future rentsExpected future rents , the rent term structureRent term structure is upward-sloping when there is no leasing cost but U-shaped when the lessor faces moderate leasing costs. Residential leasesResidential leases in Japan, which are all cancellable by tenants, exhibit a term structure consistent with our calibrated model. This result provides a new insight into the lessor’s optimal choice of rents and the equilibrium rent term premiumRent term premium .

Suggested Citation

  • Miki Seko, 2019. "The Term Premium of Cancellable Lease Rates," Advances in Japanese Business and Economics, in: Housing Markets and Household Behavior in Japan, chapter 0, pages 123-154, Springer.
    • Handle: RePEc:spr:advchp:978-981-13-3369-9_7
    DOI: 10.1007/978-981-13-3369-9_7
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