The pricing of spatial linkages in companies’ underlying assets

Spatial linkages in returns have not yet received much attention in an asset pricing context, however, they can capture important information about idiosyncratic externalities associated with firms’ holdings. We explain returns of real estate companies by modelling the spatial comovement across their underlying assets. We connect stocks of real estate firms using the location of their property portfolios and show that spatial linkages across real estate assets explain some of the variation in abnormal returns, controlling for exposure to systematic factors and firm characteristics. We propose a trading strategy that exploits the information contained in the spatial linkages of the underlying assets. We show that a long-short hedge that sells the stocks that experience a drop in the price if their connected stocks have also gone down in price and buys the stocks that experience an increase in the price if their connected stocks have also gone up delivers a non-market return of 9.7% per year

How ‘bad’ is renter protection for institutional investment in multifamily housing?

We assess the role of state-level renter protection regulations on the pricing, performance and risk of multifamily housing. We construct a renter protection score (RPS) to measure the extent of renter protection in each state. Using a proprietary property-level dataset from loans backed by commercial mortgage backed securities (CMBS) and census tract socioeconomic variables, we study the role of RPS on initial capitalization (cap) rates, annual net operating income (NOI) and annual loan delinquency rates of multifamily housing. We find that, contrary to conventional wisdom that renter protection is ‘bad’ for investors, multifamily housing in high RPS states is associated higher annual NOI and NOI growth and lower delinquency rates. We also show that better tenant protection is associated with lower initial cap rates. The results point to investors perceiving properties in more regulated states as lower risk due to reduced income volatility. For institutional investors, higher levels of renter protection are, therefore, not ‘bad’ but are instead associated with lower cash flow volatility and better income growth prospects

Bank integration and co-movements across housing markets

This paper investigates whether bank integration measured by cross-border bank flows can capture the co-movements across housing markets in developed countries by using a spatial dynamic panel model. The transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks. Changes in financial conditions are passed across borders through the banks’ balance-sheet exposure to credit, currency, maturity, and funding risks resulting in house price spillovers. While controlling for country-level and global factors, we find significant co-movement across housing markets of countries with proportionally high bank integration. Bank integration can better capture house price co-movements than other measures of economic integration. Once we account for bank exposure, other spatial linkages traditionally used to account for return co-movements across region – such as trade, foreign direct investment, portfolio investment, geographic proximity, etc. – become insignificant. Moreover, we find that the co-movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts, low limits of loan-to-value ratios and no mortgage equity withdrawal

Urban economic openness and IPO underpricing

This paper represents a first attempt to employ a macroeconomic approach to explain the high and varying IPO underpricing within a single emerging market. We examine the empirical impact of trade openness on the short-run underpricing of initial public offerings (IPOs) using city-level data. Particularly, we argue that urban economic openness (UEO) has a significant impact on the productivity and on prices of both direct and indirect real estate due to productivity gains of companies in more open areas. This in turn positively affects the firm’s profitability, enhancing the confidence in local real estate markets and future company performance, hence decreasing the uncertainty of the IPO valuation. As a result, issuers have less incentive to underprice IPO shares. We use a sample of Chinese real estate companies IPOs, which offer a suitable laboratory thanks to their strong geographic investment patterns focused locally and a country, with a highly heterogeneous openness across regions. Controlling for traditional firm-‐specific characteristics used for developed markets and Chinese-‐related features (i.e. listing location and state ownership), we find the evidence that companies investing in economically more open areas experience less IPO underpricing. Our results show high explanatory power and are robust to different specifications

Market integration, country institutions and IPO underpricing

We extend the IPO literature analysing the role of financial market integration in the development of IPO markets and the pricing of newly listed stocks. Using a hierarchical linear model, we show that differences in underpricing between markets with high and low financial integration levels are economically significant and may explain the choice of location in the listing process. Firstly, market integration negatively affects the level of IPO underpricing by increasing the importance and efficiency of the financial intermediation process via tradable securities. Secondly, the presence of a deeper market integration has a moderation effect, which weakens the explanatory power of country institutions in the cross-country variation of IPO underpricing. Finally, we suggest a hierarchical structure be assumed for the modelling of cross-country IPO studies with heterogeneous country characteristics. Our results are robust to alternative measures of financial integration and several model specifications

Preferences of institutional investors in commercial real estate

In this paper we analyze market segmentation by firm size in the commercial real estate transaction process. Using novel micro-level data, we look at the probability distribution of investors acquiring a specific bundle of real estate characteristics, distinguishing between investors based on the size of their real estate portfolio. We find evidence of market segmentation by investor size: institutional investors segment across property characteristics based on the size of their real estate portfolio. The probability that a large (small) seller will sell a property to a similar-sized buyer is higher, keeping all else equal. We explore potential drivers of this market segmentation and find that it is mainly driven by investor preferences. During the Global Financial Crisis (GFC), large investors were less likely to buy the ‘average’ property, as compared to the period before or after the crisis, indicating time-varying investor preferences

Regional development and carbon emissions in China

China announced at the Paris Climate Change Conference in 2015 that the country would reach peak carbon emissions around 2030. Since then, widespread attention has been devoted to determining when and how this goal will be achieved. This study aims to explore the role of China’s changing regional development patterns in the achievement of this goal. This study uses the logarithmic mean Divisia index (LMDI) to estimate seven socioeconomic drivers of the changes in CO2 emissions in China since 2000. The results show that China’s carbon emissions have plateaued since 2012 mainly because of energy efficiency gains and structural upgrading (i.e., industrial structure, energy mix and regional structure). Regional structure, measured by provincial economic growth shares, has drastically reduced CO2 emissions since 2012. The effects of these drivers on emissions changes varied across regions due to their different regional development patterns. Industrial structure and energy mix resulted in emissions growth in some regions, but these two drivers led to emissions reduction at the national level. For example, industrial structure reduced China’s CO2 emissions by 1.0% from 2013-2016; however, it increased CO2 emissions in the Northeast and Northwest regions by 1.7% and 0.9%, respectively. By studying China’s plateauing CO2 emissions in the new normal stage at the regional level, it is recommended that regions cooperate to improve development patterns

Asset pricing, spatial linkages and contagion in real estate stocks

Following recent methodological developments, we estimate a spatial multi-factor model (SMFM) which combines asset pricing techniques with spatial econometrics to assess systemic implications for REIT index returns. We distinguish between comovement due to market risk exposure (systematic risk) and comovement due to linkages between markets (spillover risk). We find that the spillover risk dramatically increases during the global financial crisis and can explain up to 60% of total asset variation. In the rest of the time, idiosyncratic risks have been the predominant type of risk in real estate stocks. Our results have implications for investors showing that the market can channel asset volatility leading to contagion during crisis periods and therefore residual linkages between country indices need to be accounted for as a means of assessing the diversification benefits of a global portfolio

Real estate investment and urban density:exploring the polycentric urban region using a topological lens

Focusing on commercial office real estate as both a manifestation of and a conduit of cross-border capital flows, this paper refers to the concepts of topology and topography in a theoretical and empirical exploration of contemporary ‘network economy’ spatial implications for the ‘polycentric urban region’ (PUR). A body of research has cast doubt on the normative European representation of the multi-centre PUR as a balanced, sustainable spatial development model. Yet, the model has continued to be propagated in European territorial strategy and has been influential internationally. Academic perspectives and qualitative evidence reviewed in the paper shed a light on mutual dependencies and recursive relations between network economy global structural processes, international office real estate investment practices mediated by city governments, and the spatial configuration of density. Commercial investment and city planning actor practices chime with urban agglomeration, spatial concentration and density. Quantitative evidence of associations between urban density and office real estate investment returns and capital flows is found. It is concluded that network economy topology, politics and the city are in a dialectical relationship with the PUR territorial governance agenda for spatially balanced regional development.</p