Estimating Quality Adjusted Commercial Property Price Indexes Using Japanese REIT Data
We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e., the discount rate) and the numerator (i.e., cash flows from properties) are estimated differs from the traditional method. We run a hedonic regression to estimate the quality adjusted discount rate based on the share prices of REITs, which can be regarded as the stock market’s valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated only with new rental contracts rather than those associated with all existing contracts. Using a dataset with prices and cash flows for about 400 commercial properties included in Japanese REITs for the period 2001 to 2013, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the second quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.
Looking back at the history of economic crises, there are a considerable number of cases where a crisis was triggered by the collapse of a real estate price bubble. For example, it is widely accepted that the collapse of Japan’s land and stock price bubble in the early 1990s has played an important role in the subsequent economic stagnation, and in particular the banking crisis that started in the latter half of the 1990s. Similarly, the Nordic banking crisis in the early 1990s also occurred in tandem with a property bubble collapse, while the global financial crisis that began in the United States in 2008 and the European debt crisis were also triggered by the collapse of bubbles in the property and financial markets.