The Cross Section of Expected Real Estate Returns: Insights from Investment-Based Asset Pricing

Motivated by investment-based asset pricing, we show that two firm fundamentals, investment and profitability, have substantial predictive power for REIT returns. The return predictability of investment and profitability is not subsumed by conventional models and can be useful for understanding the...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2017-04, Vol.54 (3), p.403-428
Main Authors: Bond, Shaun, Xue, Chen
Format: Article
Language:English
Subjects:
Assets
Capital budgeting
Discount rates
Earnings
Economics
Economics and Finance
Financial Services
Investigations
Investment policy
Investments
Prices
Pricing policies
Profit maximization
Profits
Rates of return
Real estate financing
Regional/Spatial Science
REITs
Stocks
Studies
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Summary:Motivated by investment-based asset pricing, we show that two firm fundamentals, investment and profitability, have substantial predictive power for REIT returns. The return predictability of investment and profitability is not subsumed by conventional models and can be useful for understanding the cross section of expected REIT returns. To illustrate, we construct an investment-based factor model for REITs that consists of a market factor, an investment factor, and a profitability factor. The investment-based model outperforms conventional models in capturing well-known cross-sectional patterns in REIT returns. Our findings suggest that incorporating investment-based asset pricing can be a promising direction for future real estate finance research.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-016-9573-0