Examining the sentiment-return relationship in European real estate stock markets

Abstract

Purpose – Recent studies in the field of behavioral finance have highlighted the importance of investor sentiment in the return-generating process for general equities. By employing an asset pricing framework, this paper aims to evaluate the performance of European real estate equities, based on their degree of sentiment sensitivity. Design/methodology/approach – Using a pan-European data set, we classify all real estate equities according to their sentiment sensitivity, which is measured relative to the Economic Sentiment Indicator (ESI) of the European Commission. Based on their individual sentiment responsiveness, we form both a high- and low-sensitivity portfolio, whose returns are included in the difference test of the liquidity-augmented asset pricing model. In this context, we analyze the performance of sentiment-sensitive and sentiment-insensitive real estate equities with a risk-adjusted perspective over the period July 1995 to June 2012. Findings – While high-sensitivity real estate equities yield significantly higher raw returns than those with low-sensitivity, we find no evidence of risk-adjusted outperformance. This indicates that allegedly sentiment-driven return behavior is in fact merely compensation for taking higher fundamental risks. In this context, we find that sentiment-sensitive real estate equities are exposed to significantly higher market risks than sentiment-insensitive ones. Based on these findings, we conclude that a sentiment-based investment strategy, consisting of a long-position in the high-sensitivity portfolio and a short-position in the low-sensitivity one, does not generate a risk-adjusted profit. Research limitations/implications – Although this study sheds some light on investor sentiment in European real estate stock markets, further research could usefully concentrate on alternative sentiment proxies. Originality/value – This is the first study to disentangle the relationship between investor sentiment and European real estate stock returns.

The emergence and performance of German REITs

“…Newell, 2016;Schulte et al, 2005) and German listed property securities in a local and European context (e.g. Haran et al, 2013;Lang and Schaefers, 2015;Lenkkeri et al, 2006;Morri and Artegiani, 2015;Morri and Baccarin, 2016;Moss and Lux, 2014;Scholz et al, 2015).…”

Sentiment Measurement and its Relationship with Housing Prices: Review of Contemporary Dimensions

“…The classification and use of this class of sentiment is prevalent in in the advanced countries dominated by the United State of America. To highlight few are: The University of Michigan Consumer Sentiment Index, Investors Intelligence confidence index, the American Association of Individual Investors (AAII) survey, and the investor survey by the SI-TUS/ Real Estate Research Corporation (Das et al, 2020: Freybote, 2016and Das et al, 2015 and the European Commission's ESI in the UK (Lang & Schaefers, 2015). Market sentiment constructed though surveys have been established to prdict changess in asset prices (Tsolacos, 2012).…”

“…Freybote & Seagraves, (2017) used quarterly data from 2000 to 2014 and discovered that changes in private real estate sentiment have greater influence on returns since institutional investors in the market relies on the market sentiment to make investment decisions and Lang & Schaefers, (2015) opined that higher sensitivity yields higher returns whereas lower sensitivity yields low returns in the housing market. They further indicated that high sentiment in real estate market are prone to higher risks compared to the low sentiments.…”