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Working Papers

CRERC  - Working Papers

The Real Estate Research Centre regularly publish research and conference papers to this webpage.  simply click on the title to download a .pdf version of a paper.


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Are Energy Efficiency Ratings ignored in the German housing market? – evidence from a large-sample hedonic study


Improving the energy efficiency levels of the housing stock is of particular concern in the private rental market where capital costs and utility cost savings are not shared in equal measure by landlords and tenants. This problem is particularly pronounced in Germany where rental properties make up the majority of the housing stock. The present study is the largest to date to investigate the effect of energy efficiency ratings on rental values. Using a semiparametric hedonic model and an empirical sample of nearly 500k observations across 412 markets in Germany with full hedonic characteristics, we find strong evidence that energy-efficient rental units are rented at a significant premium. However, this effect is not confirmed for the largest metropolitan housing markets. In a second step, a survival hazard model is estimated to study the impact of the ratings on time-on-market. It is found that energy-efficient rental properties tend to lease up more quickly than their non-efficient peers.

Marcelo Cajias, Franz Fuerst and Sven Bienert


Personality traits and energy efficiency in the UK residential market


The limitations of simple payback and investment profitability models for energy efficiency investments are well established in the literature. This paper investigates whether personality traits play a significant role in the decision-making process of investing in energy efficiency in the residential sector. Using the Understanding

Society UK survey data, we apply structural equation modelling to examine if personality traits may explain why certain individuals choose to invest in energy efficiency measures while others do not, even under almost identical financial conditions. The results show that the link between personality traits and energy efficiency measures are primarily mediated trough risk preferences and/or attitudes toward the environment. Similar mediation effects are found for pro-environmental habits. However, an important difference is that households with higher incomes have a higher propensity to invest in energy efficiency while the opposite is the case for other pro-environmental behaviours and habits. The findings of this analysis underline the need for differentiated and targeted products and policies in the market for residential energy efficiency

Ante Busic-Sontic,  Franz Fuerst, Natalia Czap


Beauty in the Eye of the Home-Owner:  Aesthetic Zoning and Residential Property Values


This paper provides empirical evidence for one of the core justifications for architectural zoning: Shape homogeneity influences the value of a residential building. Drawing on large-scale shape and transaction data, this study first develops a data-driven measure of architectural similarity, condensing three dimensional shapes to univariate shape distributions. The algorithm-based similarity estimates are good predictors of human perceptions of shape similarity and are linked to property attributes and transaction prices. For the city of Rotterdam, a price premium of approximately 4 percent for row houses in very homogeneous ensembles is estimated.

Thies Lindenthal


Conceptualising the role of personality traits in making investment decisions: The case of residential energy efficiency


This paper explores whether differences in individual personality traits may explain why some households decide to undertake an energy efficiency upgrade of their property while others opt to do nothing, even in identical financial circumstances. By using the taxonomy of the Big Five personality traits, we develop a conceptual framework for how personality traits might transmit to household economic decision making in the realm of domestic energy efficiency retrofits. This model can be tested in future empirical analyses which would otherwise be prone to confounding primary (direct) and secondary (mediated) factors impacting upon the retrofit decision. Implications for environmental policy and future research are derived. The novel conception could contribute to shed light on the still highly distinctive energy-efficiency gap in residential markets.

Ante Busic-Sontic and Franz Fuerst


Information Supply and Demand in Securitized Real Estate Markets


This study introduces a novel approach to explaining the short-term market movements of Real Estate Investment Trusts (REITs) utilizing Big Data Analytics. While literature provides several explanations for the variation of industry returns, there has been little empirical evidence of whether these patterns are attributable to the flow of information. We extract news sentiment as a proxy for information supply based on agency news and additionally investigate web search queries as an indicator for information demand. Analyzing REIT markets in the UK and US indicates a consistent pattern across both countries. While we observe a strong positive effect of news sentiment on REIT returns and stock market volatility, the effect of online search behavior is only marginal. Further, we exhibit that particularly finance-specific news sentiment measures significantly contribute to explaining NAV spreads. Hence, the application of different metrics for information supply and demand for the UK and the US yields diverse impacts on developments in securitized real estate markets. Keywords: Behavioral Finance, Big Data Analytics, Net Asset Value, News Sentiment, Online Search Behavior

Jan-Otto Jandl and Franz Fuerst


Monocentric Cyberspace:  The Primary Market for Internet Domain Names


Cyberspace is no different from traditional cities, at least in economic terms. Urban economics governs the creation of new space on the Internet and explains location choices and price gradients in virtual space. This study explores registration dynamics in the largest primary market for virtual space: Internet domain names. After developing a framework for domain registrations, it empirically tests whether domain registrations are constrained by the depletion of unregistered high quality domain names. Estimations based on registrations of COM domain names suggest that the number of domains expands substantially slower than the growth in overall demand for domain space. Supplying alternative domain extensions can relax the shortage in domains in the short term.

Thies Lindenthal


Green Clientele Effects in the Housing Market


This study investigates how the energy efficiency ratings mandated by the European Union affect house prices. Using a sample of several thousand apartment transactions from Helsinki, Finland, we test whether higher ratings were significantly associated with higher prices. In addition to a large number of property and neighbourhood characteristics, this dataset contains information on building-level energy usage which allows us to distinguish between the 'pure' price effects of energy consumption and the value of more intangible factors associated with the energy label. The hedonic model yields a statistically significant 3.3% price premium for apartments in the top three energy-efficiency categories and 1.5% when a set of detailed neighbourhood characteristics are considered. When maintenance costs containing energy usage costs are added, a robust and significant price premium of 1.3% persists whereas no differentiation is found for the medium and lower rating categories. These findings may be indicative of segmented demand for energy-efficient buildings where price premia will only be observable for the top tier of energy ratings due to a 'green clientele effect'. However, a high energy rating did not appear to speed up the sales process in the analysed market.

Franz Fuerst, Elias Oikarinen and Oskari Harjunen


A commercial real estate index for an emerging market:  The case of Beijing


Despite their large size and relevance to the overall economy, commercial real estate markets have largely evaded the push for a Big Data revolution. Infrequent transactions and non-disclosure of deal and pricing information are the most commonly named data problems which are particularly pronounced in emerging markets where market monitoring and transaction recording systems are not well established and the institutional market segment may be thin.  Beijing is a good example for this situation. A reliable quarterly office rental price index is non-existent.  This paper presents a viable approach for estimating a robust and reliable quarterly transaction-based price index based on primary data from the Beijing office market, using a two-stage frequency conversion approach.   This new index complements existing valuation-based indices by providing more accurate and timely measurements of market turning points.

Franz Fuerst, Xuefeng Liu and Prof Colin Lizieri


Energy Performance Ratings and House Prices in Wales:  An Empirical Study


This paper investigates the price effect of EPC ratings on the residential dwelling prices in Wales.  It examines the capitalisation of energy efficiency ratings into house prices using two approaches.  The first adopts a cross-sectional framework to investigate the effect of EPC band (and EPC rating) on a large sample of dwelling transactions.  The second approach is based on a repeat-sales methodology to examine the impact of EPC band and rating on house price appreciation.  The results show that, controlling for other price influencing dwelling characteristics including age, EPC band does affect house prices.  This observed influence of EPC on price may not be a result of energy performance alone; the effect may be due to non-energy related benefits associated with certain types, specifications and ages of dwellings or there may be unobserved quality differences unrelated to energy performance such as better quality fittings and materials. An analysis of the private rental segment reveals that, in contrast to the general market, low-EPC rated properties were not traded at a significant discount. This suggests different implicit prices of potential energy savings for landlords and owner-occupiers.

Franz Fuerst, Prof Pat McAllister, Dr Anumpam Nanda and Prof Pete Wyatt


Fundamental drivers of dependence in REIT returns


We analyse the empirical relationships between firrm fundamentals and the dependence structure between individual REIT and stock market returns. In contrast to previous studies, we distinguish between the average systematic risk of REITs and their asymmetric risk in the sense of a disproportionate likelihood of joint negative return clusters between REITs and the stock market. We find that REITs with low systematic risk are typically small, with low short-term momentum, low turnover, high growth opportunities and strong long-term momentum. Holding systematic risk constant, the main driving forces of asymmetric risk are leverage and, to some extent, short-term momentum. Specifically, we find that leverage has an asymmetric effect on REIT return dependence that outweighs the extent to which it increases the average sensitivity of REIT equity to market fluctuations, explaining the strong negative impact of leverage on firm performance especially during crisis periods that
has been documented in recent empirical work.


Jamie Alcock & Eva Steiner


The Dynamics of House Prices in Israel


This paper investigates the macroeconomic drivers of house prices in Israel, the OECD country with the highest growth rate in recent years, and tests for divergence of observed prices from underlying fundamentals using cointegration analysis and error-correction models for the 1998 to 2013 time period. While the recent surge in house prices is partially explained by fundamentals such as population growth, low unemployment and interest rates along with supply constraints, the results suggest that prices have deviated from fundamental values by approximately 20 percent from 2009 onwards. Stock market volatility is found to be a key predictor of house prices in the short run, indicating a shift towards increased investment in the housing market when other asset classes, notably the stock market, are perceived as very risky.:


Dotan Weiner & Franz Fuerst


Size signals success: Evidence from real estate private equity


Anecdotal evidence suggests that clout and connections matter more in private equity fundraising than actual performance. In this paper, a unique real estate private equity (REPE) dataset with buy-side and sell-side information is created by the authors to construct and analyze stacked interaction networks for each vintage year. Calculating and regressing centrality measures for industry embeddedness, the authors find that fund managers can benefit from their established connections to plan sponsors while fundraising. Adding fund size into the equation, it is demonstrated that the total capital under management and the size of previous funds have a significant and positive effect on fundraising speed.

Sebastian Krautz & Franz Fuerst


Do people or buildings matter more in predicting domestic energy consumption?


To understand the importance of and interaction between household and building characteristics in predicting domestic energy consumption, we analyse Energy Performance Certificates (EPCs) along with a host of consumption drivers. Particularly, we exploit a large sample of English dwellings drawn from the National Energy Efficiency Database (NEED) to show that property type, age, size and the main fuel used for heating play an important role in explaining the variation in gas and total energy consumption. Energy efficiency improvements including loft insulation, cavity wall insulation and new efficient boiler installation are also found to be associated with lower gas and total energy consumption. Additionally, the regression results from this sample suggest that socio-economic characteristics in the form of deprivation at local area level have a significant bearing on gas and energy consumption of dwellings. In the second sample, observations from the English Housing Survey are used to incorporate socio-economic characteristics at household level, energy prices and weather conditions into the analysis. We find households` composition, income, age and employment status to be important drivers of gas used for space heating which is also found to vary with gas prices and meteorological observations in the form of heating degree days. More importantly, the EPC rating of a dwelling is documented to be a powerful predictor of consumption level. Particularly, favourable EPC rated properties are associated with lower consumption levels, suggesting that the energy performance expressed by the EPC translates into savings on fuel costs in terms of lower energy consumption. 

Adan Hassan & Franz Fuerst

Do Energy Efficiency Measures Really Reduce Household Energy Consumption? A Difference-in-Differences Analysis 


The aim of this study is to investigate the impact of energy efficiency measures installed through the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP) on domestic gas and total energy consumption. The recently released National Energy Efficiency Data-Framework (NEED) database is used to examine the changes in domestic gas and total energy consumption for the dwellings in the sample relative to the changes in gas and total energy consumption for a comparable control group in the year after installation. By using a matched difference-in-difference methodology, cavity wall insulation, loft insulation and a new efficient boiler are all statistically observed to reduce domestic gas and total energy consumption for the sample. The single most effective energy efficiency measure when installed alone is found to be cavity wall insulation, reducing annual gas consumption by 10.5% and annual total energy consumption by 8% in the year following installation. Considering the impact of combining different energy efficiency measures, dwellings retrofitted with both cavity wall insulation and a new efficient boiler are found to experience the largest reductions in annual gas and total energy consumption of 13.3 % and 13.5%, respectively. This is followed by a mean annual reduction of 11.9% and 10.5% in gas and total energy consumption for dwellings with all three energy efficiency measures installed in the same year. Interestingly, installing cavity wall insulation on its own is found to be more effective than combining loft insulation and a new efficient boiler.

Adan Hassan & Franz Fuerst

23 Million Upgrading Decisions:  Modelling energy retrofit investments in the UK housing market: a microeconomic approach

(awaiting publication)


Purpose - Improving the energy efficiency of the existing residential building stock has been identified as a key policy aim in many countries. This study reviews the extant literature on investment decisions in domestic energy efficiency and presents a model that is both grounded in microeconomic theory and empirically tractable.  Design/methodology/approach – This study develops a modified and extended version of an existing microeconomic model to embed the retrofit investment decision in a residential property market context, taking into account tenants’ willingness to pay and cost-reducing synergies. A simple empirical test of the link between energy efficiency measures and housing market dynamics is then conducted.  Findings - The empirical data analysis for England indicates that where house prices are low, energy efficiency measures tend to increase the value of a house more in relative terms compared to higher-priced regions. Secondly, where housing markets are tight, landlords and sellers will be successful even without investing in energy efficiency measures. Thirdly, where wages and incomes are low, the potential gains from energy savings make up a larger proportion of those incomes compared to more affluent regions. This, in turn, acts as a further incentive for an energy retrofit. Finally, the UK government has been operating a subsidy scheme which allows all households below a certain income threshold to have certain energy efficiency measures carried out for free. In regions, where a larger proportion of households are eligible for these subsidies, we also expect a larger uptake.  Originality/value - While the financial metrics of retrofit measures are by now well understood, most of the existing studies tend to view these investments in isolation, not as part of a larger bundle of considerations by landlords and owners of how energy retrofits might influence a property’s rent, price and appreciation rate. In this paper, we argue that establishing this link is crucial for a better understanding of the retrofit investment decision.

Adan Hassan & Franz Fuerst


The Financial Rewards of Sustainability:  A Global Performance Study of Real Estate Investment Trusts


This study shows for the first time, that investing comprehensively in sustainability as measured by the GRESB rating pays off for REITs by enhancing operational performance and lowering risk exposure and volatility. Analyzing a sample of REITs from North America, Asia and Europe for the 2011-14 time period, it also appears that there is a great deal of untapped potential, particularly in the REIT community, to improve the sustainability performance of corporate real-estate portfolios. For real estate assets to maintain their competitive positioning, it is critical that their owners invest in measures that improve their sustainability.

Franz Fuerst

Can Institutional Investors Bias Real Estate Portfolio Appraisals?
Evidence from the Market Downturn


This paper investigates the extent to which institutional investors may have influenced independent real estate appraisals during the financial crisis.   A conceptual model of the determinants of client influence on real estate appraisals is proposed.  It is suggested that the extent of clients’ ability and willingness to bias appraisal outputs is contingent upon market and regulatory environments (ethical norms and legal and institutional frameworks), the salience of the appraisal(s) to the client, financial incentives for the appraiser to respond to client pressure, organisational culture, the level of moral reasoning of both individual clients and appraisers, client knowledge and the degree of appraisal uncertainty.  The potential of client influence to bias ostensibly independent real estate appraisals is examined using the opportunity afforded by the market downturn commencing in 2007 in the UK. During the market turbulence at the end of 2007, the motivations of different types of owners to bias appraisals diverged clearly and temporarily provided a unique opportunity to assess potential appraisal bias.  We use appraisal-based performance data for individual real estate assets to test whether there were significant ownership effects on performance during this period.  The results support the hypothesis that real estate appraisals in this period reflected the differing needs of clients.

Crosby, Devaney, Lizieri and McAllister


REIT Financing Choices: Preparation Matters


Sun, Titman, and Twite (2014) find that risky capital structure characteristics, such as high leverage, a high share of debt due in the near future and a high share of variable-rate debt, significantly reduce the cumulative total returns of US REITs over the 2007-2009 financial crisis. In this paper we show that preparing ahead of the crisis significantly improved the cumulative return over the crisis period even after controlling for the levels of the relevant capital structure characteristics at the start of the crisis. Specifically, we document that REITs which reduced leverage and increased maturity prior to the crisis fared better during the crisis. For instance, a one standard deviation reduction in leverage generated a five percent higher cumulative return during the crisis. We further find that US REITs with the highest capital structure risk (high leverage and short maturities) were more likely to prepare for the crisis ahead by reducing leverage and extending maturity. This effect is especially large for REITs with strong governance. We also document that none of our findings hold for European REITs. This suggests that since European firms did not experience or observe the levels of market excess that occurred in the US before the crisis, whether or not they prepared for the crisis had no impact on their returns during the crisis.

Pavlov, Steiner and Wachter

23 Million Upgrading Decisions:  A Microeconomic Approach to Understanding Green Investments in the UK Housing Market

Updated May 2015.  New version awaiting publication, see above ref. 08/15 

Hassan Adan and Franz Fuerst

An Empirical Approach to Land Monopoly:  The Case of  Barranquilla, Colombia

Abstract:  A land monopoly is a theoretical “impossibility” which, nonetheless, allows for a spatial empirical approach. We specify spatial tests of land monopoly, understood as a pricing strategy where land prices can be ‘over and above’ the ones determined by city-wide location and market regulation. We use the city of Barranquilla (Colombia) as a case study. This city offers ideal conditions to investigate theories of land monopoly given extreme land concentration in its highly regulated elite northern fringe. We found no evidence of land monopoly pricing by using different specifications of the spatial tests, which conformed to standard urban economic expectations.

Nestor Garza and Colin Lizieri

Behavioural Insights into Housing Relocation Decisions: The Effects of Beijing Olympics

Abstract:  This article examines the impact of mega events on Beijing housing market from a behavioural perspective. By exploring the situation surrounding the Beijing 2008 Summer Olympics, we analyze the relationship between mega-event regeneration and expected residential relocation outcomes. Our findings suggest that Beijing Olympic regeneration caused disadvantaged groups to anticipate relocation to undesirable areas, as a result of improved infrustucture, public security, and urban environment. Behavioural sciences research indicates that expectation influences decision-making by serving as a salient reference point.  Agents who perceived themselves as in a disadvantaged position or holding a gloomy prospect of their future are more likely to end up in such a situation. This paper offers insights into an effect of mega event regeneration projects that has been largely overlooked in the literature, i.e., the expected housing relocation outcomes. The research calls for government intervention and public attention to this important behavioural aspect of mega-event effects.

Mei Wang, Helen Bao and Pin-te Lin

Endowment Effect and Housing Decisions

Abstract:  Endowment effect refers to the reported gaps between willingness to accept and willingness to pay. According to prospect theory, this is a result of the underweighting of opportunity costs. Given the high-stake in a typical housing
transaction, one would expect that endowment effect to have a significant impact on housing decisions. In this paper, we develop a theoretical framework to study the presence of endowment effect and its role in housing decision-making process. Three hypotheses are derived and tested through a field experiment
conducted in Beijing, China. Our empirical evidences show that endowment effect plays an important role in the formation of judgmental biases in housing decisions. Moreover, endowment effect interacts with housing cycles. As an application of prospect theory in housing market, our study not only extends existing theoretical and empirical works in this important sector, but also sheds light on consumers’ behaviors in the emerging property market in China.

Helen Bao and Cynthia M. Gong

The Rise of Eco-Labels in the Japanese Housing Market

Abstract: This paper aims to extend the existing evidence on the investment value of green buildings to international markets, specifically the residential market in Japan. Using a unique transaction database of condominiums in the Tokyo metropolitan area and a hedonic analytical framework, we find that green buildings command a small but significant premium on both the asking and transaction prices. This finding is consistent with results from other countries. As far as we are aware, this is also the first study of green buildings' economic value based on a hedonic model incorporating buyer characteristics.

Franz Fuerst and Chihiro Shumizu

Unexpected inflation, capital structure and real risk-adjusted firm performance

Abstract: Managers can improve real risk-adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk-adjusted returns to unexpected inflation. We model these returns as a function of nominal and real assets and liabilities and illustrate our proposition using a simulation. We test the empirical implications of our model in a sample of listed US equity real estate investment trusts (REITs), enabling simple identification and measurement of real and nominal contracts. We find evidence that our sample firms observe the proposed matching relationship between nominal assets and liabilities. Moreover, we find that real risk-adjusted performance and inflation hedging qualities are inversely related to deviations from the proposed matching relationship. We infer that corporate debt holdings reflect attempts to manage real risk-adjusted performance by modifying equity exposure to unexpected inflationary shocks. We further conclude that variation in inflation hedging qualities is related to capital structure.

Jamie Alcock and Eva Steiner


The interrelationships between REIT capital structure and investment

Abstract: We explore the interdependence of investment and financing choices in US listed Real Estate Investment Trusts (REITs) in the period 1973-2011. We find that the investment and financing choices of REITs are interdependent, but they are not made simultaneously. Our results suggest that investment determines leverage, but leverage has no apparent effect on investment decisions. The fundamental role of investments for the financial success of the firm in the REIT business model leads managers to prioritise the investment decision over the leverage decision. Conversely, the debt-overhang conflict between shareholders and debt holders that theoretically drives the reverse influence of leverage on the optimal investment policy does not appear to filter through to the actual investment choices of REITs. Our findings suggest that REIT managers utilise the maturity dimension of capital structure to mitigate potential investment distortions and ensure that investment remains on its value-maximising path. We also present novel evidence on the role of investments in driving a wedge between REIT target leverage and actual leverage levels, and on the interplay of investments and leverage adjustments towards the target ratio in explaining REIT capital structure dynamics.

Jamie Alcock and Eva Steiner

How active is your real estate fund manager?

Abstract: Using a holdingsbased measure of active management termed the ‘Segment Active Share’, the paper documents that commercial real estate portfolios that are more active – i.e., have segment weights which are least like those of the index – have outperformed. Employing proprietary IPD data for 256 U.K. real estate funds over 20022011, we find that funds with high Segment Active Share on average outperformed the real estate market by 1.9% per year. These funds do not seem to take increased risk and their outperformance cannot be explained by fund size alone, though on average they are smaller funds.

Martijn Cremers and Colin Lizieri


Energy efficiency of buildings: A new challenge for urban models

Abstract: Despite some recent conceptual studies and a modicum of empirical evidence, urban models do not currently take into account the energy efficiency of buildings. This paper presents a framework for incorporating energy efficiency and energy use of buildings into urban models based on microeconomic theory and pricing mechanisms in real estate markets. Using the example of the IRPUD urban land use, transport and environment model, it is demonstrated how a simplified model of building energy-efficient new buildings and retrofitting existing buildings can be integrated into the model to forecast the overall greenhouse gas emissions of households.

Franz Fuerst and Michael Wegener


Cross-border capital flows into real estate

Abstract: This study investigates the factors that determine the volume of cross-border capital flows into direct real estate markets. In particular, we seek to establish whether existing institutional and regulatory barriers are negatively associated with the average level of cross-border real estate flows into and out of a set of 25 countries. We do not find evidence for cross-border institutional or regulatory arbitrage on the real estate market. Except credit and financial market development, hardly any other institutional and legal barriers impact significantly on the level of real estate inflows. However, the presence of institutional and legal barriers in the domestic country can hinder real estate outflows. Domestic investors are highly dependent on the domestic financial market and on debt financing from the capital markets in general. More transparent credit information serves as a catalyst of cross-border real estate investment activity. Finally, both foreign and domestic inflows are positively linked to property returns in the same year but the volume of foreign flows is generally found to be more reactive to return shocks.

Andrew Baum, Franz Fuerst and Stanimira Milcheva


Is energy efficiency priced in the housing market? Some evidence from the United Kingdom

Abstract: This paper investigates whether energy performance ratings, as measured by mandatory Energy Performance Certificates (EPCs), are reflected in the sale prices of residential properties. This is the first large-scale empirical study of this topic in the UK involving approximately 400,000 dwellings in the period from 1995 to 2011. Applying hedonic regression and an augmented repeat sales regression, we find a positive relationship between the energy efficiency rating of a dwelling and the transaction price per square metre. The price effects of superior energy performance tend to be higher for terraced dwellings and flats compared to detached and semi- detached dwellings. The evidence is less clear-cut for house price growth rates but remains supportive of an overall positive association. Overall, the results of this study appear to support the hypothesis that energy efficiency levels are reflected in UK house prices, at least in recent years.

Franz Fuerst, Pat McAllister, Anupam Nanda and Peter Wyatt