Theo Freybote, Nico Rottke and Dirk Schiereck
The purpose of this paper is to provide evidence for the ongoing significant underpricing of European property IPOs.
Abstract
Purpose
The purpose of this paper is to provide evidence for the ongoing significant underpricing of European property IPOs.
Design/methodology/approach
The paper provides recent evidence on underpricing for a comprehensive data set of 105 IPOs of European property companies. It starts with an overview of evidence and explanations for the underpricing of property IPOs and evidence for the cyclical nature of IPO activity. It then goes on to describe the methodology and data collection process. The results on initial returns are summarised.
Findings
The paper finds that the current IPO market for property shares has been shown to be hot according to common definitions. Additionally, it is safe to say that the hot property securities market has caused to some extent a hot IPO market with property indices averaging 10.69 per cent during the 100 days prior to the IPO compared to 4.65 per cent for the general equity market indices. However, the recovery in Western European property markets and lack of quality property stock in Eastern European countries has created a large financing need for property companies which can be met by going public. Thus, supply side aspects are more likely than market‐timing characteristics to be the major driver behind the current hot IPO market.
Originality/value
The paper provides evidence for an ongoing significant underpricing of European property IPOs and offers an explanation for why it is appropriate to classify the property stock market as a hot market.
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Nico B. Rottke and Julia Gentgen
The German banking sector has recently been facing high real estate loan default rates resulting in the accumulation of a high volume of distressed real estate debt in the banks'…
Abstract
Purpose
The German banking sector has recently been facing high real estate loan default rates resulting in the accumulation of a high volume of distressed real estate debt in the banks' balance sheets. As a consequence, German banks are confronted with the workout of their non‐ and sub‐performing real estate loans to proactively solve the problem. When doing so, banks have to decide whether they want to conduct the loan workout in their own workout departments (integrative approach) or whether they prefer to outsource the workout to a third party servicer or even sell their bad loan exposure to an external investor (disintegrative approach). This paper aims to investigate this issue.
Design/methodology/approach
A bank's decision to employ an integrative or a disintegrative approach can be transferred into a make‐or buy‐decision as described by the transaction cost economics. The transaction between the bank and the workout manager is analysed by the transaction characteristics of the transaction cost economics. The specificity of the human capital required for the loan workout of real estate loans is a key consideration for answering the question of integration or disintegration. Assuming highly specific investments for both, the workout manager and the bank, a formal model compares the aggregated pay offs for the bank and the workout manager to determine the optimal control structure for the specific assets.
Findings
Following the assumptions of the transaction cost economics, the specificity of the investment of the workout manager (and also the bank) is crucial for the decision of integrating or disintegrating the workout of real estate loans. The degree of specificity required to perform the workout tasks depends on the status of underlying credit engagement and the characteristics of the collateral (the real estate). The formal analysis shows that the bank and the workout manager both under‐invest in integration and disintegration scenarios. However, if the degree of specificity of the investments is equal, nonintegration is superior to integration. Forward integration is superior to nonintegration, if the bank's investment is more specific than the workout manager's investment.
Originality/value
This research paper approaches the problematic from an academic stand point, integrating both the banking and the real estate perspective and aims to provide a recommendation for banks on the integration or disintegration of the workout unit for a certain real estate secured loan portfolio.
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Verena Bentzien, Nico Rottke and Joachim Zietz
Relative to comparable industrialized countries, Germany stands out in terms of its low homeownership rate (43 percent). For Germany, it is unknown so far to what extent the low…
Abstract
Purpose
Relative to comparable industrialized countries, Germany stands out in terms of its low homeownership rate (43 percent). For Germany, it is unknown so far to what extent the low rate of homeownership can be related to housing being unaffordable. One reason for the lack of evidence is the apparent lack of data. The purpose of this paper is to fill this gap.
Design/methodology/approach
Based on a regional dataset of 3.9 million asking prices of housing units collected by a real estate listing engine, the paper applies internationally established affordability concepts to the German housing market. The authors then run a number of cross‐section regressions at the level of the 16 German federal states, using the affordability measures as explanatory variables of the rate of homeownership.
Findings
The results show that the average German household would have to sacrifice a large part of its non‐housing consumption to afford homeownership, especially of single‐family homes. As the regional analysis reveals, certain types of household can even be considered excluded from the ownership market in some particularly unaffordable states with cost burdens of over 50 percent, such as Bavaria. The cross‐section regression results for the 16 federal states affirm the importance of affordability as a determinant of the homeownership rate.
Research limitations/implications
The official data on ownership rates are rather spotty over time and only available for a single year (2006) for the time frame that is considered for the affordability analysis (2005‐2010). Given the data limitations, the regression analysis has to be confined to a single cross section least squares regression for 2006. The authors are aware that to obtain truly convincing results, it would be necessary to capture the development of ownership rates in different localities in Germany, such as the 16 federal states, over time and to check to what extent the affordability measures can explain any of the variation in ownership rates in a panel data framework with fixed effects for federal states and time. However, the authors feel that the regression results may serve as a starting point; they are better than a set of simple correlations, even if they constitute not a conclusive causal analysis.
Practical implications
Any public policy initiative to raise Germany's homeownership rate will have to address the question of how to make housing more affordable. The recent elimination of homeowner subsidies is working in exactly the opposite direction.
Originality/value
The affordability approach used is technically not new or challenging, but it offers a basis for comparison that has been conspicuously lacking so far for the fourth largest economy of the world. By applying affordability concepts that are well accepted and in use internationally, the authors believe that they can provide at least some suggestive evidence that can further spur research into the affordability issue. While the authors do not break new methodological ground with their paper, they do provide a basis of comparison for policy discussion and for further research. Germany provides a unique environment for affordability research, due to its reunification history, observations from which may thus yield insights valuable to the international research community.
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Karl‐Werner Schulte, Nico Rottke and Christoph Pitschke
German real estate markets used to show little transparency in the past. This has changed over the last 15 years. The purpose of this study therefore is to examine the current…
Abstract
Purpose
German real estate markets used to show little transparency in the past. This has changed over the last 15 years. The purpose of this study therefore is to examine the current state of transparency.
Design/methodology/approach
The study investigates and discusses the concept of transparency in general, availability of private and public market data, major real estate investment products, performance measurement, changes in the regulatory environment and the emergence of organizations and publications. The findings of this study are obtained in a comparative manner: The transparency status of the 1990s in the different areas researched is compared to the current German and other international standards. The authors describe the relatively opaque German real estate market as it was at the beginning of the 1990s and show how it has improved to date.
Findings
The results show that transparency in the German real estate market has noticeably improved in all researched areas. But still, compared with the USA or the UK, the German real estate industry and real estate market still lack transparency and are characterized by information asymmetries and opaqueness.
Originality/value
The results indicate that the German real estate market and industry become more mature and bit by bit converge with their US and UK archetype.
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Alexander Joel‐Carbonell and Nico B. Rottke
This paper seeks to research potential evidence of capital market irregularities by scrutinizing whether the IPO (Initial Public Offering) phenomenon can be found in Real Estate…
Abstract
Purpose
This paper seeks to research potential evidence of capital market irregularities by scrutinizing whether the IPO (Initial Public Offering) phenomenon can be found in Real Estate Investment Trusts (REITs).
Design/methodology/approach
The study employs stock price data of 90 US REITs and derives their performance on the first trading day, but also on a one‐, three‐, and five‐year basis.
Findings
The primary offerings puzzle frequently observed in traditional IPOs is a market imperfection that also exists for REITs from 1991 to 2008. REITs display, on average, both significant first trading day under‐pricing and negative aftermarket performance, predominantly on a five‐year basis.
Research limitations/implications
The research at hand offers evidence that stock irregularities can be found within the US REIT industry, albeit these do not necessarily serve as evidence against efficient markets. Notwithstanding the fact that it may be difficult to exploit the abnormal performance on the first day, investors can nonetheless earn substantial profits by shorting IPO stocks on a long‐term basis. Even net of transaction costs, such a strategy should have a positive abnormal return. However, these investments have to be executed cautiously as the profitability of such a strategy has to pay attention to the reputation of the underwriter, the cycle in which the IPO takes place and various other important factors.
Originality/value
The research at hand offers evidence that REIT market irregularities oppose underlying rational human behavior.
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Steffen Metzner and Andreas Kindt
The development and testing of the hedonic methods for property valuation require statistical analysis and professional preparation of relevant databases. As a first step, the…
Abstract
Purpose
The development and testing of the hedonic methods for property valuation require statistical analysis and professional preparation of relevant databases. As a first step, the presumable relevant influencing variables (parameters) have to be determined. Previous studies have shown a large variety of parameters which overlap or deviate from each other. This study aims to collect, systematise and structure different parameters for the further development and testing of hedonic models.
Design/methodology/approach
The study comprises a detailed research and deeper analysis of previous studies regarding the hedonic valuation (mainly for residential properties). Flanking areas of examination serve, if they are appropriately suitable, as supplements (e.g. performance analysis and regression). Parameters are extracted from a wide range of literature, compared and integrated into an overall presentation of the results.
Findings
In total, 407 parameters were extracted from previous studies on hedonic valuation and performance analysis. Because of various definitions of some parameters in the literature, the current paper combined them in one meaning to avoid misunderstandings in further analysis. Higher-level (global) and lower-level (specific) parameters are contained/described in the final list. The result of this study identifies up to five levels of parameters (within the relevant hierarchy).
Research limitations/implications
The parameters have not yet been statistically tested. The relevance of individual parameters has to be tested with relevant corresponding databases and statistical methods (e.g. correlation and regression).
Practical implications
To manage larger real estate portfolios, there is a need for regular property valuations. From this perspective, there is a great interest related to the optimisation of the valuation costs, valuation quality and valuation duration. Hedonic methods are considered as an efficient way of performing these valuation tasks. However, further suitable models and parameters are needed. The study describes parameters that can be appropriate for the development of relevant models and creates a structured parameters list, providing the technical basis for the latter. This structured parameter list is substantiated by the evaluation of the existing research.
Social implications
Property values represent a significant asset for the national economy and for the individual wealth/welfare. The development of property value in a national economy is also relevant for politics, economy and society. The use of hedonic methods and the knowledge of important individual parameters can contribute towards assessing and substantiating the effect of political decisions on the value of real estate.
Originality/value
For the first time, a comprehensive and structured analysis on the value of the relevant parameters used in hedonic methods is performed. Thereby a large number of parameters were identified which question the stability of the results in respective individual studies. In addition, the newly developed hierarchy of parameters can serve as the basis for further research.