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| Market Fundamentals, Risk and the
Canadian Property Cycle: Implications for Property Valuation and Investment Decisions Author: Jim Clayton Start Page: 347 Abstract: The dramatic decline
in commercial property values in recent years has changed popular perception about real
estate investment risk. This paper aims to generate new insights into real estate
investment risk and its implications for real estate valuation. It shows that the risk
premium on unsecuritized commercial real estate varies over time and is strongly related
to general economic conditions. A vector autoregressive model developed to forecast real
estate returns reveals that time variation in real estate risk is partly predictable, and
thus can help us to forecast future movements in commercial property values. The analysis
suggests that in periods surrounding major market movements, changes in commercial
property prices are driven more by changes in expected (required) returns than by changes
in current and expected future property income. Changing expected returns may reflect
rational revisions of real estate investment risk, or alternatively investor psychology or
sentiment. |
