CONTRARIAN REAL ESTATE INVESTMENT

Abstract

The profitability of contrarian investment strategy (i.e. investing in value stocks) is one of the most well-established empirical facts in the finance literature. Yet, it has only been recently applied to real estate. Thus, the dissertation examines the contrarian investment strategy in relation to real estate to fill the gap in the literature and ascertain the relative superiority in the performance of value and growth properties. After reviewing the literature germane to the topic, a case study of twenty-one office property markets in the Pacific Rim over the period 2nd quarter 1994 through 2nd quarter 2004 was carried out. It was found that contrarian investment strategy is generally superior to growth property investment. Using the initial yield to define value and growth properties, an investment strategy that involves buying value properties outperformed the growth strategy on a 1-quarter, 3- and 5-year and entire holding-period horizons. Furthermore, this study provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behaviour of the typical investor and not because these value strategies are fundamentally riskier. In particular, this study found that market participants appear to have consistently overestimated future growth rates of glamour properties relative to value properties.