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Estimating Quality Adjusted Commercial Property Price Indexes Using Japanese REIT Data

  • Chihiro Shimizu

    (Reitaku University; University of British Columbia)

  • Walter Erwin Diewert

    (University of British Columbia)

  • Kiyohiko G. Nishimura

    (Deputy Governor, Bank of Japan)

  • Tsutomu Watanabe

    (Graduate School of Economics,University of Tokyo)

We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e., the discount rate) and the numerator (i.e., cash flows from properties) are estimated differs from the traditional method. We estimate the discount rate based on the share prices of REITs, which can be regarded as the stock market’s valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated only with new rental contracts rather than those associated with all existing contracts. Using a dataset with prices and cash flows for about 500 commercial properties included in Japanese REITs for the period 2003 to 2010, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the first quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.

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File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp004.pdf
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Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 004.

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Length: 28 pages
Date of creation: May 2012
Date of revision: Feb 2013
Handle: RePEc:upd:utppwp:004
Contact details of provider: Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
Phone: +81-3-3812-2111
Web page: http://www.e.u-tokyo.ac.jp/
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  1. Diewert, Erwin & Shimizu, Chihiro, 2014. "Alternative Approaches to Commercial Property Price Indexes for Tokyo," Economics working papers erwin_diewert-2014-34, Vancouver School of Economics, revised 14 Jul 2014.
  2. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Sheharyar Bokhari & David Geltner, 2012. "Estimating Real Estate Price Movements for High Frequency Tradable Indexes in a Scarce Data Environment," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 522-543, August.
  4. Jim Clayton & David Geltner & Stanley W. Hamilton, 2001. "Smoothing in Commercial Property Valuations: Evidence from Individual Appraisals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(3), pages 337-360.
  5. Crosby, Neil & Lizieri, Colin & McAllister, Patrick, 2009. "Means, Motive and Opportunity? Disentangling Client Influence on Performance Measurement Appraisals," ERES eres2009_159, European Real Estate Society (ERES).
  6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  7. Diewert, Erwin & Fox, Kevin J., 2014. "Commercial Property Price Indexes and the System of National Accounts," Economics working papers erwin_diewert-2014-40, Vancouver School of Economics, revised 05 Sep 2014.
  8. Diewert, Erwin, 2007. "The Paris OECD-IMF Workshop on Real Estate Price Indexes: Conclusions and Future Directions," Economics working papers diewert-07-01-03-08-12-12, Vancouver School of Economics, revised 31 Jan 2007.
  9. Steven Devaney & Roberto Martinez Diaz, 2011. "Transaction based indices for the UK commercial real estate market: an exploration using IPD transaction data," Journal of Property Research, Taylor & Francis Journals, vol. 28(4), pages 269-289, June.
  10. Geltner, David & Goetzmann, William, 2000. "Two Decades of Commercial Property Returns: A Repeated-Measures Regression-Based Version of the NCREIF Index," The Journal of Real Estate Finance and Economics, Springer, vol. 21(1), pages 5-21, July.
  11. Joseph T.L. Ooi & Seow‐Eng Ong & Poh‐Har Neo, 2011. "The Wealth Effects of Property Acquisitions: Evidence from Japanese and Singaporean REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(3), pages 487-505, 09.
  12. Hayashi, Fumio & Inoue, Tohru, 1991. "The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," Econometrica, Econometric Society, vol. 59(3), pages 731-53, May.
  13. Marc K. Francke & Gerjan A. Vos, 2004. "The Hierarchical Trend Model for Property Valuation and Local Price Indices," The Journal of Real Estate Finance and Economics, Springer, vol. 28(2_3), pages 179-208, 03.
  14. Owen A. Lamont & Richard H. Thaler, 2003. "Anomalies: The Law of One Price in Financial Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 191-202, Fall.
  15. Fisher, Jeffrey D & Geltner, David M & Webb, R Brian, 1994. "Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods," The Journal of Real Estate Finance and Economics, Springer, vol. 9(2), pages 137-64, September.
  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  17. Chihiro Shimizu & Kiyohiko Nishimura, 2007. "Pricing Structure in Tokyo Metropolitan Land Markets and its Structural Changes: Pre-bubble, Bubble, and Post-bubble Periods," The Journal of Real Estate Finance and Economics, Springer, vol. 35(4), pages 475-496, November.
  18. 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, vol. 4(2), pages 127-46, June.
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