Time-varying macroeconomic risk and commercial real estate: An asset pricing perspective

Abstract

This paper empirically investigates the behavior over time of excess returns (risk premium) on commercial real estate in Singapore, one of the major Asian tiger economies. Specifically, the first and second conditional moments on office and retail real estate excess returns are related to the conditional variances and covariances of five specified macroeconomic factors: growth rate in gross domestic product, growth rate in industrial production output, unexpected inflation, short-term interest rates and market portfolio. The conditional variances of the five macroeconomic factors are time-varying. In addition, significant results are obtained from the macroeconomic volatilities as useful predictors for the expected risk premiums. This evidence can be very useful to international investors and portfolio managers interested in Asian property markets.