Essays on real estate investment and asset returns

Liang, Weijian 2024. Essays on real estate investment and asset returns. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis, consisting of three interrelated essays, uncovers the property investment behaviour of commercial real estate market players and the return patterns of the asset class. The first essay is titled “Real Estate Investment and Asset Return Dynamics: Evidence from REITs.” In this essay, I examine the relationship between aggregate REIT property investment and future public commercial real estate returns. Aggregate investment negatively predicts excess market returns over the subsequent year. The return predictive power survives controls for financial ratios, term-structure variables, investor sentiment measures, equity issuance, and operating accruals. In addition, aggregate REIT investment is weakly related to investor sentiment measures and fails to predict future firm earnings news indicators. Instead, aggregate investment is strongly tied to discount rate proxies and positively predicts macroeconomic growth indicators. And the investment’s return predictability is not subsumed by the future materialization of firm cash-flow shocks and macroeconomic fundamentals. These results suggest that the predictive relation is mainly driven by time-variation in expected returns, rather than investor sentiment. The second essay is titled “Real Estate Investment Plans and the Cross Section of Asset Returns: Evidence from REITs.” In this essay, I examine the cross-sectional expected return implications of planned real estate investments. I forecast the future investment growth of REITs using Tobin’s q, gross profitability, changes in return on assets, and prior stock returns. The forecasted future investment-to-asset changes generate a positive premium in the cross section of REIT returns. To capture the return variation, I construct a factor-mimicking portfolio based on a two-way monthly sort on size and the expected investment growth. Using the factor, an augmented REIT-based investment-based model not only holds up against comparisons with competing REIT-based and common stock-based factor models but also outperforms them in dissecting prominent REIT return patterns. I finally propose an alternative risk-based explanation for the premium. Firms with higher expected investment growth demonstrate higher future profitability, yet they also exhibit a greater degree of future operating and financial leverages and increased sensitivity of future cash flows to economic conditions, leading to higher discount rates. IV The third essay is titled “Climate Change Exposure, Green Investment, and Financial Performance: The Case of Publicly Listed Real Estate.” In this essay, I examine the real and financial implications of climate change exposure among publicly listed real estate firms. Exposure reflects earnings call participants’ attention to a firm’s climate-related opportunities, as well as regulatory and physical shocks. I find that firms with higher climate change exposure allocate more capital towards green building initiatives over the subsequent year. Additionally, tenants of high-exposure firms tend to achieve superior aggregate environmental scores in the future. The overall exposure effects are primarily attributable to firms with higher regulatory exposure. However, doing good may not mean doing well. High-exposure firms experience lower future operating and rental performance. The effect is primarily due to the reduced cash flows in firms with higher opportunity exposure. Furthermore, the opportunity exposure negatively predicts subsequent market valuations and stock returns, suggesting that investors may overlook the adverse signal of exposure for firms’ future fundamentals, or may have non financial preferences, accepting lower expected returns

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Date of First Compliant Deposit:	30 January 2025
Date of Acceptance:	30 January 2025
Last Modified:	30 Jan 2025 14:53
URI:	https://orca.cardiff.ac.uk/id/eprint/175758

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