Werner Gleißner and Cay Oertel
The purpose of this paper is the development for a conceptual framework with regard to the risk management of real estate positions as foundation for transaction decisions. In…
Abstract
Purpose
The purpose of this paper is the development for a conceptual framework with regard to the risk management of real estate positions as foundation for transaction decisions. In this context, the current market environment and legal obligations are the main drivers for market participants to improve their risk management practices. Based on this environment, a practical but science backed model is outlined.
Design/methodology/approach
The paper uses a conceptual approach based on the existing literature to develop a practical decision support system. In addition, the current risk management best practices are outlined to illustrate the corporate and methodological foundation for the decision support system.
Findings
The conceptual model development reveals a clear necessity for the supplementation of price to value measures. Additional measures are derived from theoretic considerations based on Monte Carlo Simulation approaches to the risk management of property investments. These additional risk metrics support investors in order make risk-appropriate decisions.
Practical implications
The resulting decision support system can be applied to the risk management of transaction decisions. Here, the model can be applied in any investment decision to support portfolio management considerations from a comprehensive risk management perspective. Investors can implement the system as part of their transaction procedure.
Originality/value
The existing body of literature mainly focuses on macroeconomic ratios in the context of decision support. In contrast, the present paper reveals a corporate decision support system, which is supposed to foster decisions of market agents especially with regard to potential price and value divergences and tightening legal obligations.
Details
Keywords
Cay Oertel, Ekaterina Kovaleva, Werner Gleißner and Sven Bienert
The risk management of transitory risk for real assets has gained large interest especially in the past 10 years among researchers as well as market participants. In addition, the…
Abstract
Purpose
The risk management of transitory risk for real assets has gained large interest especially in the past 10 years among researchers as well as market participants. In addition, the recent regulatory tightening in the EU urges financial market participants to disclose sustainability-related financial risk, without providing any methodological guidance. The purpose of the study is the identification and explanation of the methodological limitations in the field of transitory risk modeling and the logic step to advance toward a stochastic approach.
Design/methodology/approach
The study reviews the literature on deterministic risk modeling of transitory risk exposure for real estate highlighting the heavy methodological limitations. Based on this, the necessity to model transitory risk stochastically is described. In order to illustrate the stochastic risk modeling of transitory risk, the empirical study uses a Markov Switching Generalized Autoregressive Conditional Heteroskedasticity model to quantify the carbon price risk exposure of real assets.
Findings
The authors find academic as well as regulatory urgency to model sustainability risk stochastically from a conceptual point of view. The own empirical results show the superior goodness of fit of the multiregime Markov Switching Generalized Autoregressive Conditional Heteroskedasticity in comparison to their single regime peer. Lastly, carbon price risk simulations show the increasing exposure across time.
Practical implications
The practical implication is the motivation of the stochastic modeling of sustainability-related risk factors for real assets to improve the quality of applied risk management for institutional investment managers.
Originality/value
The present study extends the existing literature on sustainability risk for real estate essentially by connecting the transitory risk management of real estate and stochastic risk modeling.
Details
Keywords
Cay Oertel, Jonas Willwersch and Marcelo Cajias
The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target…
Abstract
Purpose
The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target market. So far, the literature has analyzed only absolute measures of investment attractiveness as determinants of cross-border investment flows.
Design/methodology/approach
The empirical study uses a classic ordinary least squares estimation for a European panel data set containing 28 cities in 18 countries, with quarterly observations from Q1/2008 to Q3/2018. After controlling for empirically proven explanatory covariates, the model is extended by the new relative measurement based on relative yields/cap rates and relative risk premia. Additionally, the study applies a generalized additive mixed model (GAMM) to investigate a potentially nonlinear relationship.
Findings
The study finds on average a ceteris paribus, statistically significant lagged influence of the proxy for relative attractiveness. Nonetheless, a differentiation is needed; relative risk premia are statistically significant, whereas relative yields are not. Moreover, the GAMM confirms a nonlinear relationship for relative risk premia and cross-border transaction volumes.
Practical implications
The results are of interest for both academia and market participants as a means of explaining cross-border capital flows. The existing knowledge on determinants is expanded by relative market attractiveness, as well as an awareness of nonlinear relationships. Both insights help to comprehend the underlying transaction dynamics in commercial real estate markets.
Originality/value
Whereas the existing body of literature focuses on absolute attractiveness to explain cross-border transaction activity, this study introduces relative attractiveness as an explanatory variable.
Details
Keywords
Cay Oertel, Thomas Gütle, Benjamin Klisa and Sven Bienert
The purpose of this paper is to analyze potential diversification benefits of American real estate assets for European investors. Since European real estate yields are compressed…
Abstract
Purpose
The purpose of this paper is to analyze potential diversification benefits of American real estate assets for European investors. Since European real estate yields are compressed due to several reasons, including high market liquidity and low interest rates, investment managers seek opportunities to provide attractive risk-return profiles for investors. Therefore, empirical proof for improvements to risk-return profiles is highly necessary in the outlined market environment.
Design/methodology/approach
The empirical study uses a classic mean-variance optimization approach. In order to isolate potential diversification benefits two investment environments are compared: first, an optimization for the European investment horizon is carried out. Subsequently, the same optimization is performed for European and American assets. For both scenarios, risk-return profiles are obtained and compared.
Findings
Two major findings can be stated: first, higher correlations between European and American markets can be observed for the present data in comparison to older studies. Second, the mean-variance optimization of solely European and then mixed European-American portfolios show improvements in risk-return profiles for the latter. Thus, diversification benefits of American properties for European real estate investors can be confirmed.
Practical implications
The empirical study reveals diversification benefits for European investors. Thus, the asset allocation of European investors could be affected by allocating capital toward the USA in order to improve risk-return profiles.
Originality/value
The value of the paper is a precise analysis of two markets, namely Europe as well as the US. Thus, the paper isolates the practical implications for European investors, who are trying to improve risk-returns profile by allocating capital toward the USA.