| This study examined two issues related to pricing commercial real estate. First, the performance of the NCREIF Property Index, was analyzed from the perspective of the fundamental sources of return: initial earnings yield, dividend payout ratios, earnings growth, shifts in capitalization rates and other (less significant) effects. The results indicate these sources that have contributed to the Index's considerable cross-sectional variation as well as its time series variation. Therefore, this study should be viewed as a useful historical account for those interested in understanding the ex post return-generating process of the Index as well as those who wish to model the ex ante return-generating process for a variety of applications in both the debt and equity markets.; Second, real estate investment trusts are used to pursue two related research questions: (a) Can a firm's characteristics be used to determine its pricing (as measured by the firm's dividend yield)? (b) After adjusting for these characteristics, do “value” firms outperform “growth” firms? The first of these questions is hedonically addressed. It was found that a significant portion of the cross-sectional variation in REIT dividend yields can be ascribed, using hedonic techniques, to the differences in their characteristics. The explanatory power of the hedonic models generally improved as the time period becomes more recent and the data set becomes more robust. The “excess” dividend yield (from the findings of the first question) was then viewed as the basis for identifying characteristic-adjusted growth and value firms. A zero-investment portfolio is formed each year acquiring the value firms and selling short the growth firms. However, no (statistically significant) arbitrage profits can be earned. This is interpreted as a yet another affirmation of the efficient market hypothesis and, by extension, a refutation that value firms—once adjusted for their characteristics—outperform growth firms. |
