A GLOBAL PERSPECTIVE ON REAL ESTATE CYCLES

A GLOBAL PERSPECTIVE ON REAL ESTATE CYCLES

THE NEW YORK UNIVERSITY SALOMON CENTER SERIES ON FINANCIAL MARKETS AND INSTITUTIONS VOLUME 6 1. I.T. Vanderhoof and E. Altman (eds.): The Fair Villue of Insurance Liabilities. 1997 ISBN 0-7923-9941-2 2. R. Levich (ed.): Emerging Market Capital Flows. 1997 ISBN 0-7923-9976-5 3. y. Arnihud and G. Miller (eds.): Bank Mergers & Acquisitions: An Introduction and an Overview. 1997 ISBN 0-7923-9975-7 4. J.F. Carpenter and D.L. Yermack (eds.): Executive Compensation and Shareholder Villue. 1998 ISBN 0-7923-8179-3 5. I.T. Vanderhoof and E. Altman (eds.): The Fair Villue of Insurance Business 2000 ISBN 0-7923-8634-5

A GLOBAL PERSPECTIVE ON REAL ESTATE CYCLES Edited by STEPHEN J. BROWN David S. Loeb Professor of Finance Stern School of Business New York University CROCKER H. LIU Stern School of Business New York University l1li... " SPRINGER SCIENCE+BUSINEDD MEDIA, LLC

Library of Congress Cataloging-in-Publication Data A global perspective on real estate cycles / edited by Stephen ]. Brown, Crocker H. Liu. p. cm.-(the New York University Salomon Center series on financial markets and institutions; v.6) Rev. papers from a conference hosted by New York University's Salomon Center in March, 1999. Includes bibliographical references. ISBN 978-1-4613-4655-5 ISBN 978-1-4419-8642-9 (ebook) DOI 10.1007/978-1-4419-8642-9 1. Real estate investment--congresses. 2. Real estate development--congresses. 3. Real estate business--congresses. 4. Real estate investment trusts-congresses. I. Brown, Stephen ]. II. Liu, Crocker H. III. Series. HD1382.5.G576 2000 333.33-dc21 00-025876 Copyright 2001 by Springer Science+ Business Media New York Originally published by Kluwer Academic Publishers in 2001 Softcover reprint of the hardcover 1 st edition 2001 A1l rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+ Business Media, LLC. Printed on aad-free paper.

CONTENTS List of Contributors Foreword ix vii Introduction STEPHEN J. BROWN AND CROCKER H. LIU 2 The Global Real Estate Crash: Evidence From An International Database 5 WILLIAM N. GOETZMANN AND SUSAN M. WACHTER 3 Real Estate and the Asian Crisis: Lessons of the Thai Experience 25 BERTRAND RENAUD, MING ZHANG, AND STEFAN KOEBERLE 4 Real Estate Income and Value Cycles: A Model of Market Dynamics 63 YOON DOKKO, ROBERT H. EDELSTEIN, ALLAN J. LACAYO, AND DANIEL C. LEE 5 The Cross Section of Global Property Share Returns 89 PIET EICHHOLTZ AND RONALD HUISMAN 6 Evidence of Cycles in European Commercial Real Estate Markets-And Some Hypotheses 103 ANDREW BAUM Index 117

LIST OF CONTRIBUTORS Andrew Baum, Henderson Investors, London and The University of Reading, UK Stephen Brown, Stern School of Business, New York University Yoon Dokko, School of Business Administration, ~ou University, Korea Robert Edelstein, Haas School of Business, University of California, Berkeley Piet Eichholtz, Limburg Institute of Financial Economics (LIFE), Maastricht University William Goetzmann, Yale School of Management Ronald Huisman, Rotterdam School of Management, Erasmus University and FinEdge Rotterdam Stefan Koeberle, The World Bank, Washington DC Allan Lacayo, Haas School of Business, University of California, Berkeley Daniel Lee, Haas School of Business, University of California, Berkeley Crocker Liu, Stern School of Business, New York University Bertrand Renaud, The World Bank, Washington DC Susan Wachter, The Wharton School, University of Pennsylvania Ming Zhang, The World Bank, Washington DC

FOREWORD In March 1999, New York University Salomon Center in association with the Department of Finance at NYU Stern held a one-day conference on the impact of real estate cycles on the real estate industry both from a domestic as well as an international perspective. The conference featured the leading research on this topic in the United States, Europe and Asia. Currendy, the real estate industry is at a critical point. New development projects around the world are being put on hold given recent developments in the international capital markets. The industry is hard hit by the decline in real estate investment trust (REIT) share prices and a shrinking pool of capital for real estate ventures. This has unfortunately coincided with serious financial problems of very large hedge funds and other institutional investors in the market for commercial mortgage backed securities. There is need for new insights into the implications of U.S. and global real estate cycles on real estate securities including REITs and mortgage-backed securities as well as direct real estate investment. This global orientation is important given the high mobility of capital into the real estate, the increasing integration of real estate markets, and the proposed expansion of real estate investment trusts (REIT) into international real estate. The process of globalization has resulted in increased competition between cities for the attraction of investment. In response to the globalization of investment markets, local property cultures throughout the world are being transformed to accommodate the practices and requirements of institutional property markets. At the same time, a dearth of serious academic research currendy exists on these markets. For example,

x Foreword the lack of attention paid to the real estate sector in Asia is surprising when one considers that thirty of forty percent of short term capital was advanced to countries in the region prior to the recent crisis. In fat, a commonly reported driver of this crisis was the exposure of major Asian banks to real estate. Allegedly, as real estate markets plummeted, banks suffered enormous losses due to their exposures to real estate developers, these problems then spread to the rest of the financial sector. An interesting observation comes from Paul Krugman's recent book, The Return oj Depression Economics!: "How did a few bad real estate loans and a botched devaluation in Thailand-a small,jaraway country of which most people knew little--sent dominoes toppling from Indonesia to South Korea?" Towards this end, our conference offered new insights into the implications of U.S. and global real estate cycles on real estate securities including REITs and mortgagebacked securities as well as direct real estate investment. The most important insight is that the amplitude and frequency of the cycles differ from place to place and time to time. To the extent that this implies that real estate markets around the world are not yet fully integrated, there are opportunities for global investors. There are also risks. The markets are becoming more correlated, most particularly in periods of crisis. Indeed, the relative immaturity of the Thai real estate market contributed significandy to the extent and severity of the Asian financial crisis of 1997. To exploit these opportunities and to manage the resulting risk, portfolio managers need to develop new data sources and empirical procedures designed to maximize the information content of the data that is available. The lack of high quality data emerges as the central and most pressing issue, not only from a portfolio management context, but also from the standpoint of public policy. We thank Ingo Walter, the Director of the NYU Salomon Center, who gready contributed to the planning of this conference, and we acknowledge with gratitude the Center for its very generous financial support. We also thank Mary Jaffier for her very professional handling of the administrative arrangements. We would like to thank the authors of the papers individually for contributing their research and ideas to this collection of papers. Finally, we would like to thank the following discussants and roundtable participants who contributed so much to the success of our conference: Kenneth Campbell, CRA Real Estate Securities, William Goetzmann, Yale School oj Management, Samuel A. Lieber, Alpine Management, David Ling, University oj Florida, Jianping Mei, Stern School oj Business, New York University, Jay Sa-Aadu, University oj Iowa, and Joseph Williams, ProJessor's Capital. NOTE 1. Krugman, Paul, 1999, The Return of Depression Economics, Norton, New York.

A GLOBAL PERSPECTIVE ON REAL ESTATE CYCLES