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Research Seminars & Workshops @ IRES

Presenter:Dr Qian Wenlan

Assistant Professor, NUS Business School

Discussant:Professor James Shiling

Michael J. Horne Chair in Real Estate Studies
DePaul University of Commerce

Is Liquidity Priced in the Commercial Real Estate Market? Measure and Evidence


12 December 2011, Monday


12.30 pm – 2.00 pm


RMI Executive Seminar Room
21 Heng Mui Keng Terrace, Level 4


Using a national sample of transactions in 24 major office markets in the US from 1995 to 2010, this paper shows that illiquidity is an important determinant of price and expected returns in one of the most illiquid asset markets-real estate market. We propose two novel measures to capture the price impact and search cost aspects of illiquidity in the real estate market, both of which are easily obtainable from price and volume data. At the market level, the price impact measure, which reflects the degree of supply and demand imbalance, is positively correlated with the proportion of transactions with high vacancy and negatively related to transaction volume and the proportion of transactions with 1031 exchanges. The search cost measure is strongly positively correlated with time-on-the-market, high vacancy, 1031 exchange and out-of-state buyer proportion and is negatively correlated with the proportion of auction sales. Using both quarterly hedonic price index (estimated from the transaction data) and the average quarterly transaction price, we find that there is price discount and higher expected return in markets with high price impact and search cost. The illiquidity premium is driven by the bust period, when a 10% increase in either the price impact or search cost measure is associated with more than 4 percentage point increase in the annualized expected return in the cross section. The required return for markets with higher search cost is even greater during the most recent financial crisis in 2008. Lastly, the effect of illiquidity costs, especially the search cost, is stronger in the non-Class A office market and there is some evidence of flight-to-liquidity across office markets during the most recent crisis.

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