Country Legal Origin of Direct Real Estate Risk Premiums

Abstract

This paper examines the institutional nature of legal origin and the total returns (TRs), derived from investing in a country’s direct real estate, and via the adoption of a multi-factor APT model. Quarterly direct real estate data from the Jones Lang LaSalle Real Estate-Asia index is used for 13 cities in Asia and across 3 sectors (office, residential and retail) are obtained. Findings confirm the existence of smoothing effects that cause a temporal bias and a seasonal lag. The 1^st and 4^th order autoregressive model is adopted to de-smooth the TRs. De-smoothed data is used in conjunction with 2 macroeconomic variables (real GDP growth rate and interest rate) and 1 real estate risk factor (vacancy rate) to form the multi-factor structural model. A pooled panel analysis is conducted with the law-system dummies, denoting British legal origin and French legal origin, and the factor loadings (i.e., the sensitivity of the risk factor to the TRs). Macroeconomic and real estate risk factors in equilibrium affect the TRs. Vacancy rate commands high and significant premium owing to its direct impact on the TRs, relative to GDP growth rate and interest rate. Both the British and French legal origins have a significant relationship each on the TRs.