Research under review

 Upcoming research 2015

 Forthcoming research “The Impact of Liquidity on Valuation and Capital Raising for Global Listed Real Estate Companies” has been accepted for presentation at the 2015 ARES Conference in Fort Myers, FL, April 14 to April 18, 2015.


 The impact of liquidity on valuation and capital raising for global listed real estate companies


 In a previous paper we examined the impact of liquidity on the valuation of European property shares. The result showed that there was a strong relationship between liquidity, valuation and market capitalisation post GFC . We also concluded that it also had significant implications for fund raising and therefore a company’s ability to grow.

 In this paper we extend the study to include North American and Asian companies, thereby allowing for regional differences in the liquidity effect, and also accounting for local valuation preferences.

In addition this study also contributes to the real estate literature by analyzing the financing decisions of REITs from a capital market perspective. We examine the relationship between the liquidity of a company and the level of equity and debt issuance and pricing pre and post GFC. The primary source of repayment and liquidity for a REIT is external capital, through an equity or debt offering , rather than operating cash flows. Unlike other corporate entities, REITs retain little cash because they are typically required to pay 90% of their taxable income to shareholders. Therefore, liquidity shortages due to dividend payout or refinancing are key credit risks for REITs which will ultimately restrict their performance.

We will analyse the use of long term debt and short term CP issuance from REITS to manage liquidity and discuss how the access to different funding sources impacts on REIT performance across different the different geographic regions.


Alexander Moss, Consilia Capital, London, Cass Business School, City University London, UK

 Dr Nicole Lux, Cass Business School, City University


Research focus 2014

Academic Focus: Highlights from the American Real Estate Society (“ARES”) Conference 2014

The 30th annual ARES conference was held this year in San Diego on April 1st -5th. There were nearly 300 papers submitted. The selected paper below is the first one under review.

Under review: Managing Risk in the Real Estate Portfolio Through the Use of Leveraged and Inverse ETFs.

Authors: Richard Curcio and Randy Anderson, University of Central Florida

Purpose: The study seeks to identify whether leveraged ETFs (both long and inverse) can be usefully deployed in managing real estate portfolio risks, where derivative instruments such as index-based futures and options have traditionally been used.

Since the inception of the first real estate ETFs in 2000 they have grown in number to 22 currently.

Leveraged ETFs were introduced in 2007, and in total their number has grown to more than 200, at least eight of which are leveraged, long and inverse, real estate and real estate related ETFs. The authors note that some of these leveraged real estate and real estate related ETFs are frequently among the top 10 most actively traded securities in the US.

The objective of their research is to evaluate the advantages and limitations of using leveraged ETFs rather than traditional derivative instruments. Leveraged and inverse ETFs appear to offer greater simplicity in the implementation of sophisticated trading tools to manage risk, but there are limitations. Namely; i) the negative impact of leverage in a declining market, and ii) tracking error.

The tracking error rises particularly as leveraged ETFs seek investment results for a single day. To achieve their daily return goals these funds make extensive use of derivative securities. The structure of the derivatives has to be reset at the end of each day, which gives rise to daily compounding and constant leverage, which can cause the fund returns, for periods longer than a single trading day, to differ significantly from the funds target return.

Cheng and Madhavan (2009) concluded that buy and hold investing in leveraged ETFs, under volatile conditions in the benchmark index, can lead to eventual value destruction. Trainor and Baryla (2008) concluded that annual leveraged ETF returns fell well short of the stated daily objective. However, do these analyses overstate the problems?

Conclusions: The authors conclude that holding positions in leveraged, long and inverse, ETFs beyond a single trading day does indeed expose the portfolio to potentially sever tracking error. However, they point out that while tracking error can be detrimental , falling short of the leveraged ETFs stated goal, it can, alternatively be advantageous, exceeding the expected financial objective. Whether the tracking error is a positive or detrimental factor will be dependent upon the volatility of the underlying index.

Trading activity in these leveraged ETFs may itself increase volatility in the benchmark index, thus decreasing performance. Late day rebalancing by the issuers may also increase volatility of the benchmark index near the close. The authors conclude that the tracking error associated with using leveraged ETFs beyond a single trading day should not prevent informed investment managers from using these ETFs in real estate portfolios.

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