While much attention has focused on the modeling of office property markets, little emphasis has been put on distinguishing between permanent and temporary effects. This article attempts to address this issue in the context of the rental adjustment mechanism and the demand-employment relationship for major Australian central business district office markets. It is shown that, by allowing the natural vacancy rate and the work-space ratio to be endogenously determined, it offers richer model specifications that permit a partitioning between long-run and short-run influences. This is achieved by employing econometric techniques that examine the stochastic behavior of time series data. It is found that, while equilibrium relationships exist (between the vacancy rate and rent, and demand and employment), other macroeconomic variables are found to be relevant cyclical determinants. Copyright 2008 American Real Estate and Urban Economics Association
Purpose -The aim of the paper is threefold: to provide an overview of gearing in the Australian real estate investment market; formally examine the relationship between property returns, risk and gearing; and provide some guidance in evaluating "optimal" gearing levels for real estate investment. Design/methodology/approach -A mathematical modelling framework is presented for evaluating the relationship between investment returns, risk and gearing levels. Findings -The study highlights that risk rises with rising gearing levels and that risk-adjusted returns fall with rising gearing. Furthermore, it is shown that the gearing-risk relationship is influenced not only by the cost of debt structure but also the interdependency between ungeared returns and interest rates.Research limitations/implications -The study suggests that current gearing levels from Australian listed property trusts and unlisted wholesale property funds are relatively conservative. This implies that current gearing could be increased, in particular for wholesale funds, without taking on substantially more risk whilst enhancing returns. Practical implications -The paper is of value to industry and academia as it offers an extended framework for evaluating the relationship between risk and gearing. In particular, the framework provides insight for gauging gearing levels when constructing real estate investment strategies. Originality/value -Importantly, the paper shows that the interdependency between ungeared returns and interest rates significantly impacts the relationship between risk and gearing.
The paper addresses the existence of an equilibrium unemployment-vacancies (UV) relationship in Australia. Cointegration test results suggest that no bivariate long-run (UV) relationship exists. Moreover, this finding fails to support the basic model of labour job search. However, a modified Beveridge Curve is proposed where it is found that a number of trivariate equilibrium relationships exist between unemployment, vacancies and one other variable; the replacement ratio, the proportion of long-term unemployed or the real wage. The existence of an equilibrium relationship in the multivariate framework is due to the endogenous modelling of the (un)employment flows which are assumed to be exogenous in the bivariate framework of the Beveridge Curve.
PurposeThe Australian REIT (A‐REIT) market has undergone significant change over the past ten years with a shift from passive investment strategies to more active investment strategies in an attempt to deliver higher return performance. However, this has dramatically changed the risk characteristics of A‐REITs. Essentially, the sector has become more risky. Factors contributing to the increasing risk profile include: rising gearing levels; greater offshore exposure; evolving management structure towards stapled trusts, and growing market concentration. This paper aims to address these issues.Design/methodology/approachIn an attempt to gauge the impact of the changing risk characteristics over time the paper employs two formal risk measures: time‐varying beta and news impact curves. Both measures indicate that the sector has become more risky. Indeed, it could be argued that the pronounced fall in A‐REIT prices during late 2007 reflects a re‐rating of risk on the upside. The post credit crisis financial climate warrants a review of investment strategies; in particular, growth style investments that may be carrying a high level of embedded risk and opaque income streams.FindingsCurrent market sentiment suggests that investors have become more risk averse, and as such, will refocus on A‐REITs that cater for defensive style investments. Such vehicles will have low to moderate gearing levels, hold quality property assets in their portfolio, limited off‐shore exposure, and employ sound management practices.Originality/valueThe heightened risk‐averse environment presents opportunities for new investment products that provide partial exposure to direct property investment as a way to mitigate excessive equity market volatility.
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