Article

The Journal of Real Estate Finance and Economics

, Volume 51, Issue 1, pp 52-85

First online:

International Direct Real Estate Risk Premiums in a Multi-Factor Estimation Model

  • David Kim Hin HoAffiliated withDepartment of Real Estate, School of Design Environment, National University of Singapore Email author 
  • , Kwame Addae-DapaahAffiliated withDepartment of Real Estate, School of Design Environment, National University of Singapore
  • , John L. GlascockAffiliated withCenter for Real Estate & Urban Economics, University of Connecticut, School of Business

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Abstract

We estimate international risk premiums for North and South Asia and US direct real estate by using a pooled-panel multi-factor least squares model. Data for the paper are from JLL REIS-Asia and the Russell-NCREIF Property Indexes. Our results, based on the Geltner and Miller (2007) 1st and 4th order autoregressive de-smoothing models, affirm the existence of appraisal smoothing in the direct real estate market returns. Secondly, our findings affirm that the true historical volatility of autoregressive lagged de-smoothed returns is a reasonable estimate of international direct real estate risk premiums. Thirdly, we find that changes in macroeconomic and real estate variables explain the office and retail returns more than the residential returns. There is also a high vacancy rate risk premium that we attribute to country-specific, institutional environmental factors. Furthermore, the South Asia direct real estate risk premium is found to be higher than that for North Asia. Moreover the risk premiums for North and South Asia are higher than that for the US. Finally, our results show that appraisal smoothed returns significantly underestimate the international direct real estate risk premiums for the sampled Asia markets and the US.

Keywords

North and South Asia US Direct real estate International risk premiums Pooled-panel data Multi-factor least squares model Autoregressive de-smoothing Macroeconomic variables and real estate variables