CORPORATE REAL ESTATE AND STOCK RETURNS

Abstract

Corporate real estate has become an increasingly significant component in the balance sheets of publicly listed non-property companies, undeniably contributing to corporate wealth of these companies. Yet, many corporate managers tend to regard their real estate assets as a cost centre, failing to realize the impact this asset has on many aspects of the business entity, from operations to affecting shareholder value via stock returns. However, mounting evidence point to the importance that real estate assets play in affecting corporate performance. One area that has yet to receive much attention is the impact of real estate holdings on stock return variability. This study employs the two-factor Capital Asset Pricing Model (CAPM) framework, using market beta and property, the latter represented by eight different proxies, as independent variables and stock return as the dependent variable, to determine if the real estate holdings of non-property companies have any effect on their stock return performance. The empirical findings provide some indication of property being a variable in the cross-section of stock returns. However, the insignificant property coefficients show evidence of market tendency to "undervalue" property assets of non-property companies. As such, while property contributes to stock return variability, non-property companies are seemingly discouraged from owning such assets since they tend to yield less return due to "undervaluation". Therefore corporate managers must manage real estate more strategically in order to overcome some of the rationale behind "undervaluation" and maximise shareholder value.