AN INVESTIGATION OF THE MACROECONOMIC VARIABLES ON THE PERFORMANCE OF COMMERCIAL REAL ESTATE

Abstract

This study empirically investigates the behaviour over time of excess returns (risk premium) on commercial real estate. More specifically, the first and second conditional moments on commercial real estate excess returns to the conditional variances and covariances of five specified macroeconomic variables are examined. The five macroeconomic variables employed in this study are growth in gross domestic production variable, growth rate in industrial output, unanticipated inflation, short term interest rates and market portfolio. There is considerable evidence in the literature to suggest that real estate returns are influenced by the macroeconomy. Most studies that include macroeconomic variables were based on previous studies of stock market returns. Some of the macroeconomic variables include the growth rate in real capita consumption, real Treasury Bill rate, term structure of interest rate and unanticipated inflation. The Generalized Method of Moments (GMM) is employed to estimate the relationship between excess real estate returns and the macroeconomic risk. It is shown that the macroeconomic variables do have an influence on the real estate returns. This result is consistent with studies done using UK and US data. An attempt to examine the difference between developing and developed countries is made. The findings show that GDP growth variable and the market portfolio variable are the common factors that the developed and developing commercial real estate markets are exposed to, although to different extent. Developed countries are sensitive to inflation-related variable such as unexpected inflation while the developing countries are not.