Asset Productivity, Local information Diffusion, and Commercial Real Estate Returns

45 Pages Posted: 9 Jul 2020 Last revised: 9 Sep 2020

See all articles by David C. Ling

David C. Ling

University of Florida - Hough Graduate School of Business Administration

Chongyu Wang

Concordia University; University of Florida

Tingyu Zhou

Florida State University

Date Written: June 16, 2020

Abstract

The geography of a firm’s assets is an important determinant of its investment decisions and productivity, which, in turn, drives stock returns. We construct a novel measure of the returns earned by private market investors in the metropolitan areas where each equity REIT owns properties. We then risk-adjust this geographically weighted proxy for each REIT’s property portfolio return (PPR) by regressing it against the sensitivity of the REIT’s returns to systematic risk factors. We find that this risk-adjusted property portfolio return (αPPR) predicts the cross-section of returns in the public REIT market, suggesting a slow diffusion of asset-level information into stock returns. Our findings also suggest it is the slow diffusion of information about “local” prices changes, not current rental income or local liquidity, that predicts REIT returns. Moreover, the αPPRs associated with REIT allocations to major “gateway” markets are more predictive of REIT returns than the property portfolio returns produced by allocations to secondary and tertiary markets. This study improves our understanding of the extent to which “local” information about the productivity of a firm’s assets is capitalized into stock prices and the speed at which it is capitalized. This study also contributes to the literature on the predictability of REIT returns and the relation between private and public CRE returns using firm-level, instead of index level, returns.

Keywords: Commercial real estate returns, Local information diffusion, Return predictability, REITs

JEL Classification: G11, G12, D82, R11

Suggested Citation

Ling, David C. and Wang, Chongyu and Zhou, Tingyu, Asset Productivity, Local information Diffusion, and Commercial Real Estate Returns (June 16, 2020). Available at SSRN: https://ssrn.com/abstract=3628872 or http://dx.doi.org/10.2139/ssrn.3628872

David C. Ling

University of Florida - Hough Graduate School of Business Administration ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States
(352) 392-0153 (Phone)
(352) 392-0301 (Fax)

Chongyu Wang (Contact Author)

Concordia University ( email )

1450 Guy Street
Montreal, Quebec H3G 1A1
Canada

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Tingyu Zhou

Florida State University ( email )

821 Academic Way
Tallahassee, FL 32306
United States

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