VALUE INVESTING : A REAL ESTATE PERSPECTIVE

Abstract

Value investing has been superior in the equity market. When applied to real estate, value premium proves to be superior to its growth counterpart. Shanghai historical residential properties perform better than its growth counterparts with consistent value spread and higher median values for quarter, 3, 5, and 7 years investment horizons. The value premium of the Shanghai residential properties is more obvious with longer investment time frame, and they are at 11.47% and 16.87%. Explanations for value premium have been argued to be risk and naïve extrapolation of past performance. Results of this study show that both explanations need further scrutiny. Risk is not an explanation for the value premium observed in the Shanghai residential properties. Market conditions were not severe when value properties underperformed growth properties. Furthermore, standard deviations of the portfolios are not consistent to show that risk could be an explanation for the premium. Likewise, naïve extrapolation of past performance cannot also be concluded to be an explanation for value premium. Even though value properties experience higher rental growth rate after portfolio formation, growth properties experienced an even greater increase.