The Other Side of Value: The Effect of Quality on Price and Return in Real Estate

Posted: 18 Mar 2017

See all articles by Sara Anzinger

Sara Anzinger

Independent

Chinmoy Ghosh

University of Connecticut - Department of Finance

Milena T. Petrova

Bocconi University

Date Written: March 16, 2017

Abstract

We examine the effect of quality on price and return in real estate. Quality real estate stocks generally trade at higher prices. However, similar to findings in the aggregate stock market (Asness et al., 2013), quality in listed real estate is not fully reflected in price. A long quality, short junk portfolio (QMJ) is found to produce average risk-adjusted returns of 3.6 percent per quarter (14.4 percent annually). QMJ has a significantly positive coefficient when added as a dependent variable to a 4-factor model explaining U.S. real estate excess returns, including market, size, value and momentum factors, and leads to a small improvement in the overall fit of the model. Further investigation of the components of quality shows that profitability has a consistently positive relationship with real estate excess returns, while higher dividend payout is consistently associated with lower returns, in contrast to findings for conventional firms.

Keywords: Quality Attributes; Firm Performance; Real Estate Prices; Real Estate Returns

Suggested Citation

Anzinger, Sara and Ghosh, Chinmoy and Petrova, Milena T., The Other Side of Value: The Effect of Quality on Price and Return in Real Estate (March 16, 2017). Journal of Real Estate Finance and Economics, Vol. 54, No. 3, 2017, Available at SSRN: https://ssrn.com/abstract=2934641

Sara Anzinger

Independent ( email )

Chinmoy Ghosh

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

Milena T. Petrova (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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