Working Paper: NBER ID: w9894
Authors: Patric H. Hendershott; Bryan D. MacGregor
Abstract: Recent analyses have suggested the irrationality of investors in Australian and U.S. office properties. More specifically, investors have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this paper we analyze the determination of UK office and retail capitalization rates and provide evidence that these rates reflect rational expectations of mean reversion in future real cash flows. Moreover, these rates are linked to capitalization rates (dividend/price ratio) and expected dividend earnings growth as expected.
Keywords: capitalization rates; investor rationality; UK property market; mean reversion; real cash flows
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| appraisal process (H43) | property capitalization rates (G31) |
| expected real cash flow growth (D25) | property capitalization rates (G31) |
| higher expected real cash flow growth (D25) | lower capitalization rates (G31) |
| real estate capitalization rates (R33) | expected real rental growth (R21) |
| real estate capitalization rates (R33) | expected real dividend growth (G35) |
| mean reversion of real rents (R21) | real estate capitalization rates (R33) |