Systematic Valuation Errors and Property Cycles: A Clinical Study of the Sydney Office Market

Patric Hendershott

Research in Financial Economics from Ohio State University

Abstract: The cyclical variation in office construction, vacancies, rents and values over the last decade has been enormous throughout the world. Numerous hypotheses have been advanced for this enormity, including prolifigate lenders, egomaniacal developers, and even rational behavior in the face of uncertainly and long gestation periods. Our analysis of the Sydney office market suggests a major role for the failure of investors to understand the workings of property markets. Given the incentives of developers to build when value rises substantially above replacement cost and not to build when value is low relative to replacement cost, the property market has to be mean reverting. That is, when times are really good (low vacancy rates and high real rents), they can't continue, and the same is true when markets are really bad. Because Sydney investors did not incorporate this implied mean reversion into their forecasts of future cash flows, they over valued properties when values were already high, thereby triggering excessive construction and vacancies. Of course, valuations obtained by simply "capping" current cash flows are unlikely to incorporate full mean reversion.

References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cob.ohio-state.edu/~fin/journal/dice/papers/1996/96-11.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.cob.ohio-state.edu/~fin/journal/dice/papers/1996/96-11.pdf [301 Moved Permanently]--> https://www.cob.ohio-state.edu/~fin/journal/dice/papers/1996/96-11.pdf [301 Moved Permanently]--> https://fisher.osu.edu/~fin/journal/dice/papers/1996/96-11.pdf [301 Moved Permanently]--> http://fisher.osu.edu/people/fin/journal/dice/papers/1996 [301 Moved Permanently]--> https://fisher.osu.edu/people/fin/journal/dice/papers/1996)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wop:ohsrfe:9611

Access Statistics for this paper

More papers in Research in Financial Economics from Ohio State University Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().