Estimating quality adjusted commercial property price indexes using Japanese REIT data

摘要

We propose a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. Our method is based on the present value approach, but the way the denominator (i.e. the discount rate) and the numerator (i.e. cash flows from properties) are estimated differs from the traditional method. We run a hedonic regression to estimate the quality adjusted discount rate based on the share prices of REITs, which can be regarded as the stock market's valuation of the set of properties owned by the REITs. As for the numerator, we use rental prices associated with all existing contracts, as well as rental prices associated with new rental contracts, which may contain more information on future cash flows from properties. Using a data-set with prices and cash flows for about 400 commercial properties included in Japanese REITs for the period 2001-2013, we find that our price index signals turning points much earlier than an appraisal-based price index; specifically, our index peaks in the second quarter of 2007, while the appraisal-based price index exhibits a turnaround only in the third quarter of 2008. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.