12 lessons from the ZEW Real Estate Conference

The MCRE team member Minyi Hu attended the 15th ReCapNet conference hold at ZEW in Mannheim. The topic covers housing, mortgage, land market, commercial real estate, and real estate finance. Following are the key research takeaways from the conference:

1.Transaction Taxes and Housing Market Dynamics: New Evidence from a Quasi-Natural Experiment(By YunLong Huang and Stanimira Milcheva)

This paper assess the effect of a temporary removal of housing transaction taxes in 2020 in the UK, the Stamp Duty Holiday (SDH), on housing prices, transaction and listing volumes, and liquidity. The paper shows that the SDH would lead to an increase in prices and a greater surplus for sellers. While the SDH achieved its intention to stimulate housing market activity during the early stages of the pandemic and to enable the housing market to adjust to a new way of living and commuting, it inadvertently reduced housing affordability for the people most in need of housing.

2.Mortgage Market Design and Wealth Inequality: Evidence from Interest-only Mortgages(By Claes Bäckman, Danial Ali Akbari, Natalia Khorunzhina, and Timo Trimborn)

This paper studies how mortgage market design affects wealth inequality. Mortgage amortization payments require household to save and build up wealth in the form of home equity, but also restricts portfolio choice. Using the mortgage market reform in Denmark, they show that interest-only mortgages are U-shaped across the wealth distribution, and households chose to save less after choosing interest-only mortgages. They build a model of heterogeneous households for an endowment economy with risky and non-risky assets to evaluate the impact of this structural change on households' portfolio composition and wealth inequality in the economy.

3.Fractional Home Ownership and Its Impact on Life Cycle Portfolio Choice (By Marlene Koch)

This paper study the fractional home ownership on individuals' optimal consumption, savings, and housing decisions using a quantitative life cycle model. The author found that access to fractional home ownership is particularly attractive to young and old individuals, and leads to earlier housing market entry, later housing market exit, decreases individuals' loan-to-value ratios and reduces their moving activity at old age, all in comparison to a setting in which the individuals' rent-versus-own decisions are binary.

4.Import Competition and Bank Portfolio Rebalancing(By Vahid Saadi)

This paper investigate the impact of the rise in import competition from China on U.S. banks’ credit portfolios during the period from 1999 to 2006. They indicates that while aggregate mortgage lending declines in exposed counties, banks that are more exposed to the rise in import competition increase their mortgage origination significantly in non-exposed areas, and expand their geographical reach into new counties. Mortgages originated by such banks in new counties are more likely to be high-interest loans issued to low-FICO score, high-LTV borrowers that would have otherwise been credit rationed. And banks are rebalancing their loan portfolio from business loans towards residential loans during the sample period.

5.Pick Your Greens: Market Share and The Green Mortgage Boom(By David Echeverry and Michael Connolly)

Using data on multifamily mortgages bought by Fannie Mae since 2016, this paper indicates that mortgage lenders with a larger share of a given metropolitan area originate a higher volume, number, and proportion of green lending in that location relative to low market share issuers. Green loans by lenders with market power command higher interest rate spreads, but also exhibit better cash flow performance ex-post. The results are stronger for market segments more likely subject to information asymmetries. Their results suggest high market share lenders might be cherry-pick the loans that will perform best when greened.

6. Carrot and Stick Zoning (By Daniel Lebret, Crocker H. Liu, and Maxence Valentin)

This paper shows both public and private sectors can share in the value increase from public interventions from Public-private partnerships (PPP) in real estate: Regulators offer changes in land-use regulations to real estate developers (Carrot) in exchange for the provision of public goods (Stick). They indicates that an increase in land prices is a catalyst for zoning change requests; regulators are more likely to approve these requests if there are in-kind provision of public goods; land value does not significantly increase after land use restrictions are relaxed; and the mandatory inclusion of public goods impedes development activity.

7. Estimating Urban Land Values(By Rainer Schulz, Martin Wersing, and Axel Werwatz)

This paper develop a semi-parametric econometric model for urban land values. They combines the standard model of housing production with penalized regression splines to estimate land values from, both, developed and undeveloped properties. The spline basis expansions are constructed over a triangulation of the urban space, and allows to estimate a location value surface which takes complex features, such as lakes and forests, into account. After fitting the model to transaction data from Berlin, this paper found that the estimated location value surface is in agreement with the expected structure of urban land values, the estimated land values are also highly correlated with expert-based land appraisals.

8.Tenant satisfaction and commercial property performance(By Minyi Hu, Nils kok and Juan Palacios)

This paper estimate how office tenant satisfaction shapes demand for office space. They indicates that tenant satisfaction is positively correlated to their willingness to renew the lease, likelihood to recommend the property to prospective tenants, and possibility of staying in the property. In addition, the analysis of the financial performance of properties shows that higher satisfaction is related to higher growth of gross rents, effective gross rent and vacancy rate. Heterogeneity analyses suggest that the role of satisfaction is strongest for short-term tenants and those properties located in sub-markets with high vacancy rates.

9.Persistently Poor Performance in Private Equity Real Estate(By Da Li and Timothy Riddiough)

This paper compares the performance of Buyout (BO), Venture Capital (VC), and Private Equity Real Estate (RE) funds. They found that RE funds underperform BO and VC, as well as the public market alternative. For RE, the worse performing fund managers survive at a high rate, and susceptible to diseconomies of fund scale, with no skill-based persistence to offset the negative scale effects. Analysis of noisy fund manager selection indicates that RE investors are not disadvantaged relative to BO and VC. They indicates that LP investors in RE funds seem to be optimizing something other than investment return when selecting fund managers.

10.Performance and Productivity of Listed and Non-listed REITs(By Erik Devos, Zifeng Feng, and William Hardin III)

This paper compares the public and private REITs over the 1993-2021. They found that the public REITs are larger in terms of assets and revenues, grow more quickly, and have more cash and debt, their performance are significantly and economically better in terms of NOI and FFO when deflated by total assets or by equity. Moreover, they indicates that the performance is positively related to productivity and to listed status.

11.Value Uncertainty and Returns to Housing (By Francisco Amaral)

Using housing transactions in major German cities over the past four decades, this paper studies the idiosyncratic risk in returns to housing. The author found that there is large differences in the predictability of sales prices across individual houses, and houses with greater price uncertainty are sold at a discount, generate higher rental yields, and yield larger total returns. And the price uncertainty of a specific house is linked to its degree of standardization: the more similar a property is to the market's standard properties, the lower the uncertainty around its price.

12.What Makes Real Estate Different? A New Approach to Commercial Real Estate Asset Pricing(By Shaun Bond, Yu-Jou Pai, and Huibin Weng)

Using an unbalanced panel of cash flows and an equity market traded factor, this paper estimate quarterly dynamic internal rate of returns (IRR) and commercial real estate-specific alphas, and then examine the drivers of real estate returns based on a set of common macroeconomic risk factors. They show that the dynamic alphas will increase with aggregate funding liquidity and aggregate equity trading liquidity, which suggests that investors view commercial real estate as a safe asset and demand lower alphas when equity market or credit market conditions deteriorate. They also show the alpha is also partially related to compensation on property manager efforts.

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