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The Return Volatility of Publicly and Privately Owned Real Estate Does private core real estate ownership generate lower return volatility than REITs? A cursory analysis of NCREIF data would suggest that this is the case, and that it has lower correlation with returns on stocks and bonds. But NCREIF's use of appraised property values not only introduces an appraisal lag, but also introduces four sources of artificial return smoothing. These smoothing biases result in NCREIF reflecting "marketless," rather than market, returns. When similar smoothing and lag are applied to REIT returns, and NCREIF returns are leveraged equivalently, the measured return volatilities of NCREIF and NAREIT are basically equal. Thus, we conclude that core real estate performs roughly the same whether publicly or privately owned.
Linkages Between Chinese and Indian Economies and American Real Estate
Markets The author argues that labor-force modernization by China and India has been a major force keeping inflation low throughout the industrialized world, including America and Western Europe. This, in turn, has been a key factor permitting the world's central banks and banking systems to keep interest rates low, fueling a worldwide housing boom. The increase in American homeowner wealth has been astounding: $3.2 trillion in the last five years, compared to the increase of $3.7 trillion in all of the 1990s. We are entering a period of general global economic expansion in which interest rates are likely to rise, or at least to stop falling, ending their long secular decline from their peak in 1982. But the shift to even gradually rising interest rates should cool off the intense boom in housing prices and mortgage refinance that has dominated single-family residential markets for several years—and sucked tenants out of apartments. A major across-the-board rollback in housing prices throughout America seems unlikely. The author concludes that if the current general economic expansion lasts long enough, it should stimulate greater space demands for non-residential property. This will help offset the negative impact of rising interest rates on the profitability of such property.
The Expanding World of Cross-Border Real Estate Investors are finding it increasingly attractive to invest in more than their home country. While international real estate investing lags that for stocks or bonds, and is limited to a relatively small sub-set of countries, it continues to grow. Some of this investment is being made to reduce risk; however, the dominant motivation today is the effort to enhance returns.
Hurdle Rates for International Real Estate Investing This paper quantifies global risk factors and calculates hurdle rates across countries with those risk factors. The authors' approach evaluates an array of variables that may affect hurdle rates of return on real estate; they estimate a two-equation model that attempts to explain both economic and real estate market risk using a subset of these variables. The specific subset of variables used is determined empirically. Using a simulation approach with parameters derived empirically from their model, the authors then calculate hurdle rates of return by country, assuming that variations in the hurdle return due to appreciation are proportional to the variations due to income.
How Affordable is Affordable Housing? Affordable housing is a replacement for traditional public housing. Instead of isolating low-income families, affordable housing mixes them among various income groups. Low-income tax credits provide incentives to developers, while block grants assist state and local governments in subsidizing community development corporations and other non-profit housing organizations. Since affordable housing is built to be indistinguishable from private housing, it is not inexpensive. Recent research finds that subsidized housing crowds out equivalent-quality low-income housing that otherwise would have been provided by the private sector. The author questions this housing strategy and suggests that assisting low-income tenants directly through housing vouchers is both cheaper and more efficient than subsidizing bricks and mortar.
Housing Supply Restrictions Across the United States Across the United States, there are a large number of local government regulations that have an effect on residential construction and the supply of housing. As the severity of these regulations varies across geographic locations, new residential construction is much more responsive to demand conditions in some areas as opposed to others. Because areas with stricter housing supply regulations cannot accommodate shocks to labor demand, the amount of new construction can impose limits on labor migration. The author investigates the effect of housing markets on local economic performance by estimating the elasticity of housing supply for individual metropolitan areas. These estimates reflect the degree of constraint on residential construction that is imposed by local government regulations. As a result of these regulations, places with a low elasticity of housing supply have experienced less migration and lower employment growth rates during the past two decades.
Hard Landing For more than forty years, Penn's Landing in Philadelphia has been the site of grand development proposals, all unbuilt. The checkered development history of this site serves not only as a cautionary tale but also as a chronicle of how urban development theories have changed, yet stayed the same. Over the years, master planners and developer teams have proposed a variety of uses: residential, commercial, retail, entertainment, institutional. The site has some inherent limitations in terms of access and closeness to the city, which have defeated all development attempts thus far, most recently a $329 million entertainment and retail complex. The Penn's Landing site teaches several lessons: it is difficult to develop large urban sites; it is important to understand the market; it is difficult to combine public and private spaces in a city; and waterfront sites are not automatically commercially attractive.
Balancing Private Development and Public Good The School of Design and the Graduate School of Education of the University of Pennsylvania, in partnership with the editorial board of The Philadelphia Inquirer, the region's largest daily newspaper, organized a series of public forums on the future of the Philadelphia waterfront at Penn's Landing during a series of public events that included presentations on waterfront development and small-group sessions during which common- ground planning principles for the site were sought. These principles included: local character; a focus on the river; establishing connections with the city; creating a regional attraction; a realistic economic program; public character; and a public decision process. Three alternatives are described and discussed: a public park; a new residential neighborhood; and a regional waterfront attraction. The author concludes that while a public process can create problems for professional planners, it successfully affords the public a way to inform policy makers and planners, without actually making policy or designing projects.
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