skip to primary navigationskip to content

Working Papers

CRERC  - Working Papers

The Real Estate Research Centre regularly publishes research and conference papers to this webpage. 

Simply click on the title to download a .pdf version of a paper.


Ref.Title (click to download)Authors

Tearing down the information barrier:  the price impacts of energy efficiency ratings for buildings in the German rental market


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 the German housing market with its predominance of rented accommodation over owner occupancy. 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 760 thousand observations across 403 local markets in Germany with full hedonic characteristics, we find evidence that energy-efficient rental units are rented at a 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 energy ratings on time-on-market. It is found that energy inefficient dwelling have longer marketing periods and are hence less liquid than their more energy efficient counterparts.

Marcelo Cajias, Franz Fuerst and Sven Bienert


Reference Dependence, Loss Aversion and Residential Property Development Decisions


We analyse land transaction and residential development data from Beijing, China and identify that developers’ evaluation of land transaction exhibits reference dependence and loss aversion.  Developers with prior land transaction losses set higher house prices than those without prior losses. This effect is strongest at the beginning and towards the end of the property sales period.  It is moderated by developers’ ownership structure and listing status. Privately-owned firms experience stronger effects than their state-owned counterparts, whereas unlisted firms are more strongly affected than their listed counterparts. Results have implications on the relationship between the land and the housing markets in China. In a booming land market where land acquisition entails a high price, developers will transfer excess land price to house prices, thereby increasing the latter. The land market plays an integral role in managing housing prices in China.

Helen Bao, Charlotte Chunming Meng and Jung Wu


Machine Learning, Building Vintage and Property Values


This paper makes three contributions: First, it introduces an algorithm that collects pictures of individual buildings from Google Street View. Second, it trains a deep convolutional neural network (CNN) to classify residential buildings into architectural styles, taking into account spatial dependencies of building vintages. Third, it investigates whether architectural styles influence house prices. For re-sales, the architectural style is a significant determinant of transaction prices while no such effect is found for new buildings. This indicates that any premia are for vintage-related quality characteristics and not for a home’s beauty.

Thies Lindenthal and Erik B Johnson


Public Services, Real Estate Taxes and Fees, and Housing Prices in China:  A Study Based on Chinese-style Decentralisation


In this research, we extend the work of Stadelmann and Billon (2012) by incorporating Chinese-style decentralization variables. We do this to explore the characteristics of tax capitalization and the capitalization of public services under the city governances in China. As an indicator of Chinese-style decentralization, the city-level administrative hierarchy leads to city-level differentiation of fiscal resources and public services. We argue that this further causes a huge disparity in housing prices among China’s 35 major cities. Meanwhile, the land transferring fee is a factor driving the increase in urban housing prices.

The main contributions of this research are fourfold. One, we provide a reasonable explanation for the structural intercity housing price differences in China’s 35 major cities. Two, we use the method of principal component analysis (PCA) to calculate the 35 major cities’ public services indexes. Three, we use measures of land-related taxes and land transferring fees to check the effects of tax capitalization. Four, we use the number of city-level government officials at the deputy bureau chief and above levels for the first time as an instrumental variable and an indicator for Chinesestyle
city-level decentralization to help mitigate the endogeneity in the panel data analysis.

Yanfen Huang, Chao Zhang, Helen Bao and Huayi Yu


On the Strategic Timing of Sales by Real Estate Developers:  To Wait or Pre-sell?


In timing property listings, real estate developers can exercise the “option to wait” or “option to presell” to mitigate price uncertainty risk. In this study, we study the effectiveness of both strategies under a unified framework. We test our hypotheses using residential developmentdata from Hong Kong between 1995 and 2015. Empirical evidence shows that when the presale option is unavailable, developers tend to adopt the waiting strategy when facing price uncertainty risk. Conversely, when a presale option is available, developers will accelerate sales when price volatility is high. Moreover, the effectiveness of the presale option depends substantially on government restrictions. Our approach facilitates the identification of the net effect of either tool and provides an opportunity to unify conflicting findings in the literature.

Dr L i, Helen Bao and Prof K W Chau


Investor overconfidence and trading activity in the Asia Pacific REIT markets


Overconfidence is one of the most robust behavioral anomalies in financial markets. By attributing investment gains to their ability, investors become overconfident and trade aggressively in subsequent periods. Evidence from stock markets shows that overconfidence leads to excessive trading and, subsequently, inferior investment performance. However, studies on overconfidence effect are lacking in the real estate sector, which is particularly true for Asia Pacific real estate investment trust (REIT) markets. Thus, this study verifies the overconfidence effect in six Asia Pacific REIT markets, namely, Australia, Hong Kong, Japan, Singapore, South Korea, and Taiwan. The study finds that the overconfidence effect is more conspicuous during market boom periods or in inefficient market conditions. In addition, simulation analysis demonstrates that overconfidence could lead to rather large volumes of excessive trading activities in certain markets. Findings are robust across the alternative measures of control variables. Moreover, the policy implications of the research are also discussed.

Helen Bao and Steven Li


Housing Wealth and Residential Energy Consumption in the UK


Housing wealth effect often manifests as a positive relationship between consumption and perceived housing wealth (e.g., the perceived value of houses). When the perceived value of a property rises, homeowners may feel more comfortable and secure about their wealth, causing them to spend more. This study adopts a behavioural approach to verify if this relationship holds true for residential energy consumption in the UK. While controlling for property characteristics as well as a large number of demographic, socioeconomic and energy-use behaviour variables, we identified a significant relationship between housing wealth and energy consumption. Our models also considered psychological biases in energy consumption behaviours such as the framing effect.

Our findings not only shed light on the behavioural aspects of housing wealth
effect on residential energy consumption, but also demonstrates the possibility
and potential to ‘nudge’ households towards energy conservation. Most importantly, we also provide empirical evidences on the intriguing relations among housing wealth, residential energy consumption, and fuel poverty. We argue that overlooking the presence of fuel poverty risks a superficial interpretation of any identified housing wealth effect on residential energy consumption. The fuel vulnerable group should be analysed separately from the rest of the population due to their different energy consumption patterns. This finding is particularly helpful to design and implement energy consumption policies that can strike a balance between social justice and economic efficiency.

Helen Bao and Steven Li


500 Years of Urban Rents, Housing Quality and Affordability


We study urban housing rents and quality from 1500 to 2017 for Amsterdam, Antwerp, Bruges, Brussels, Ghent, London, and Paris. Based on a dataset of 436,000 rent observations, we relate rent developments to wages and consumer prices. Real rents have developed similarly in the long term, but reflect shorter-run differences in local economic and political conditions. Long-run growth in real rents has been limited. The ratio of wages to market rents was stationary before 1900, but grew considerably after that. Most of the increase in housing expenditure that did occur is attributable to increasing housing quality rather than rising rent.

Piet Eichholtz, Matthijs Korevaar and Thies Lindenthal


Housing affordability:  Is new local supply the key?


This paper seeks to predict the impact of future housing supply on the affordability of residential space in the United Kingdom, using quantitative model-based simulation methods. Our spatially disaggregated analysis focuses on the greater South East region, approximately within 1.5 hours commuting time from Central London. A dynamic spatial panel model is applied to account for observed temporal variations in property prices and housing affordability across districts.  The dynamic structure of this model allows us to assess the scale and extent of knock-on effects of local supply shocks in one district on other districts in the region. These complex spatial effects have been largely ignored in local or regional housing market forecasting models to date.
Applying this model, we are able to demonstrate that local house prices and affordability are not only determined by the underlying supply and demand conditions in the market in question, but also depend crucially on conditions in neighbouring housing markets whose properties can be considered close substitutes within a larger regional housing market. We also show that increasing housing supply in the most critical areas has little impact on (both local and regional) affordability,
even if wages do not change in response to an increase in employment.

Bernard Fingleton, Franz Fuerst and Nikodem Szumilo


Currency Risk Management for Investors in Asia Pacific Non-Listed Real Estate Funds


Currency movements potentially have a major impact on the domestic currency cashflows from international real estate investments and understanding and managing currency risk is therefore an important part of the investment process.

This research explores how investors in Asia Pacific non-listed real estate vehicles approach these issues and uses a simulation analysis to explore the impact of different hedging strategies. The real estate literature highlights how currency volatility can potentially offset the diversification benefits from international real estate portfolios.  The literature highlights that it is appropriate for large multi-asset investors to manage currency at an aggregate level. It also suggests that different hedging strategies might be appropriate for different investors and that 100% hedging may not be appropriate for some investors in some markets.

The survey of Asia Pacific non-listed real estate vehicle investor undertaken as part of
this research provides an indication of current practice in managing currency risk arising from international real estate investment.

Nick Mansley and Zilong Wang



Increased Tail Dependence in Global Public Real Estate Markets


This study examines the tail dependence of returns in international public real
estate markets. By using daily returns of real estate securities in seven countries
from 2000 to 2018, we analyze how the interdependence of international
securitized real estate markets has changed since the Global Financial Crisis. We
divide our sampling period into pre-, during, and post-crisis periods, and estimate
both upper and lower tail dependence coefficients for each sub-period. Our
empirical results confirm that most country pairs have changed from tailindependent
to tail-dependent since 2007. Strong tail dependence persists
throughout during crisis and post-crisis periods. The findings from the post-crisis
sub-sample provide new evidences on increased tail dependence in global real
estate market in recent years. We conclude that international real estate
securities still offer diversification benefits nowadays but to a lesser extent than in
the pre-crisis period. Investing in global real estate securities markets is beneficial
for cross-region, mixed-asset portfolios.

Yang Deng, Helen X H Bao and Pu Gong


Behavioural Analysis of Housing Satisfaction with Relocations: Field Evidence from China


This paper proposed a theoretical framework based on prospect theory to explain the
determinants of housing satisfaction among relocated residents. We test the two most important elements of prospect theory, namely, reference point dependence and loss aversion. For reference point dependence, we investigate the presence of both internal and external reference points; for loss aversion, we test its effect directly by comparing coefficients in loss and gain domains and indirectly by verifying the presence of the endowment effect. Our study area is Xiamen, China, where the recent urbanization frenzy provides a natural experiment setting to reliably test our hypotheses. Our empirical findings provide convincing evidence to support the four hypotheses developed from prospect theory, indicating that prospect theory is a working theory to better understand the motivations and concerns of relocated residents. Policy recommendations are subsequently derived to reduce social conflicts and disharmony caused by urban redevelopment and relocations.

Jinhai Yan and Helen X H Bao


A Behavioral Interpretation of the NAV Discount Puzzle in Listed Real Estate Companies


The NAV discount is a long standing puzzle in the listed real estate context. In this paper we extend the existing literature’s rational and noise trader explanations by exploring the influence of specific irrational behaviors. Based on behavioral biases identified in the stock and real estate markets, we hypothesize the existence of a relationship between lagged NAV growth and the NAV discount. The findings provide initial evidence of trend-chasing behavior between the dual real estate markets. The results have broader implications for the perception of the relationship between public and private real estate markets.

Sally Monson, Helen Bao and Colin Lizieri


The Dynamics of House Prices in Israel and the Effect of the Investor's Fear Gauge


In this paper, we investigate the macroeconomic drivers of house prices in Israel, the OECD country with the highest growth rate in recent years, and test for the divergence of observed prices from underlying fundamentals using cointegration analysis and error correction models for the 1998 to 2013 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% 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 and Franz Fuerst


Income risk in energy efficient office buildings


This article examines the impact of improving energy efficiency of office buildings on their financial risk. While multiple studies report a sustainability premium little is known about the corresponding risk. This research reviews the financial benefits in the context of their impact on risk. After a theoretical analysis of the topic, it forms two hypotheses which are supported with empirical tests performed on a large panel dataset of US commercial office buildings. Changes in the magnitude of the green premium in rent and changes in rental volatility are used as indicators of financial risk associated with energy certification. The study concludes that acquiring an EnergyStar certificate is related to a structural change in statistical characteristics of rents which
may be related to the level of energy efficiency. The average effect is positive but varies over time.

Nikodem Szumilo and Franz Fuerst


CEO Overconfidence in Real Estate Markets: A Curse or A Blessing?


This paper studies the influence of CEO overconfidence on firms’ financial performance and corporate social responsibility (CSR) in the US real estate investment trust (REIT) market. CEO overconfidence has been shown to have both negative and positive influences on firms. This paper is the first to combine the two sides in a single framework. We find that firms with overconfident CEOs tend to have better CSR performance. In addition, better CSR performance can increase firms’ financial performance, but this positive relationship is undermined by the existence of overconfident CEOs. Our results not only shed light on the two sides of CEO overconfidence in the real estate sector, but also provide a new prospective for research on the CSR–financial performance relationship.

Helen Bao and Steven Li


Land Assembly in Amsterdam, 1832-2015


Inner city redevelopment frequently involves the assembly of small lots into bigger ones.  We analyze joint lot development and the influence of coordination and transaction costs of land assembly on the exercise of the redevelopment option, using Amsterdam micro housing information for 1832, 1860 and 2015. In all, we have a complete set of building structure and household characteristics for dwellings on almost 30,000 lots for each of these years.  We estimate a logit model to predict joint lot redevelopment, based on structural characteristics of lots and dwellings and on social characteristics of their occupants. The results show that both types of characteristics significantly explain land assembly, and the regression coefficients adhere to the theoretical land assembly literature. This paper contributes importantly to our knowledge of the specific land parcel and structural physical characteristics that impact redevelopment. To our knowledge, this is the first paper to study the joint characteristics of the potentially combinable lots, and to document and quantify the role of social characteristics in land assembly.

Thies Lindenthal, Piet Eichholtz and David Geltner


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