Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application

Cheng, Ping; Lin, Zhenguo; Liu, Yingchun

doi:10.1016/j.jhe.2010.03.002

Cited by 35 publications

(29 citation statements)

References 29 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Because the duration of an investment can affect its after-tax profitability, we investigate the impact of capital gains taxation on the holding period. The relevance of the holding period in investment decisions was emphasized by Alles and Murray (2009), who found a significant impact of holding periods on investment performance for different asset classes, and Cheng et al (2010), who built on prior empirical studies and theoretically showed that the decision about the time to sell is crucial for real estate investments and their performance. Against this background, the following research questions arise: When should an investor divest?…”

Section: Introductionmentioning

confidence: 99%

Hold or sell? How capital gains taxation affects holding decisions

et al. 2016

View full text Add to dashboard Cite

Investments with exit flexibility require decisions regarding both the investment and holding period. Because selling an investment often leads to taxable capital gains, which crucially depend on the duration of an investment, we investigate the impact of capital gains taxation on exit timing under different tax systems. We observed that capital gains taxation delays exit decisions but loses its decision relevance for very long holdings. Often the optimal exit time, which indicates the maximal present value of future cashflows, cannot be determined analytically. However, we identify the breakeven exit time that guarantees present values exceeding those of an immediate sale. While, after-taxes, an immediate sale is often optimal, long holding periods might also be attractive for investors depending on the degree of income and corporate tax integration. A classic corporate tax system often indicates holdings over more than 100 periods. By contrast, a shareholder relief system indicates the earliest breakeven exit time and thus the highest level of exit timing flexibility. Surprisingly, high retention rates are likely to accelerate sales under a classic corporate system. Additionally, the worst exit time, which should be avoided by investors, differs tremendously across tax systems. For an integrated tax system with full imputation, the worst time is reached earlier than under partial or non-integrated systems. These results could help to predict investors' behavior regarding changes in capital gains taxation and thus are of interest for both investors and tax policymakers. Furthermore, the results emphasize the need to control for the underlying tax system in cross-country empirical studies.

show abstract

Section: Introductionmentioning

confidence: 99%

Hold or sell? How capital gains taxation affects holding decisions

et al. 2016

View full text Add to dashboard Cite

show abstract

“…5 More recently, Cheng et al [2011a] formally demonstrate, from an opposite angle, that a general mean-variance analysis cannot be simplified to the commonly known single-period MPT without the i.i.d. In fact, numerous studies have repeatedly documented that real estate returns exhibit strong autocorrelation and serial persistence.…”

Section: Single-period Theory Versus Multi-period Realitymentioning

confidence: 99%

“…Cheng et al [2010b] call the lines in Exhibit 1 the risk curves, by analogy to the well-known yield curves. These standard deviations are "scaled" so that the standard deviation of one-quarter of each index is 1.…”

Section: E X H I B I T 1 the Risk Curves Of Ncreif Indexes (1978q1-20mentioning

confidence: 99%

Is There a Real Estate Allocation Puzzle?

Cheng¹,

Lin²,

Liu³

2013

JPM

Self Cite

View full text Add to dashboard Cite

“…One approach to measuring liquidity risk in private commercial real estate markets is that of Lin and Vandell (2007), Bond et al (2007), and Cheng et al (2010). These papers measure the volatility in asset returns over the (uncertain) time to sale (time-on-market) and use this as a measure of liquidity risk.…”

Section: Liquidity In Private Real Estate Marketsmentioning

confidence: 99%