Do financial markets price location of real estate assets: evidence from the european REITs sector

Alain Coen, Jerome Picault and Arnaud Simon

ERES from European Real Estate Society (ERES)

Abstract: The aim of this research is to contribute to the literature of factors that explain the risk premium of listed real estate companies. Thanks to extensive data collection and geomatics work, we are able to construct indicators measuring the quality of the location of the buildings in the real estate portfolio of a group of European listed real estate companies. These indicators, once aggregated at the level of each REITs, enable us to mobilize the literature on factor models (CAPM, Fama-french) to construct a location factor. This location factor is econometrically tested to assess its ability to explain the risk premium of European REITs. The results obtained through GMM estimation are differentiated by company size. The location factor is highly significant for properties in the two largest size deciles, but insignificant for those in the smallest. We then adopt a rolling regression approach to study the evolution of the location factor over time, and compare it with that of market beta. The joint evolution of the two factors seems to suggest the existence of a regime change over the period, with the inflection point occurring around 2005. Prior to this date, location beta and market beta appear to have had similar levels. After 2005, the spread between the two betas seems to increase significantly.

Keywords: commercial real estate; factors; Quality; REITs (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2025-01-01
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