The Effect of Sentiment on Commercial Real Estate Returns: Investor and Occupier Perspectives

Cheung, K.S. and Lee, J. (2021), "The effect of sentiment on commercial real estate returns: investor and occupier perspectives", Journal of Property Investment & Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JPIF-01-2020-0010

35 Pages Posted: 18 Feb 2021

See all articles by William Ka Shing Cheung

William Ka Shing Cheung

University of Auckland Business School

Joshua Lee

affiliation not provided to SSRN

Date Written: January 15, 2021

Abstract

Real estate is an asset that is traded in highly segmented, illiquid and informationally inefficient local markets. A short sale in real estate is almost infeasible and therefore impedes informed rational arbitrageurs to trade against mispricing. Thus, real estate returns are prone to sentiment-driven behaviours. Will the impacts on asset returns be identical for different types of sentiment? This study argues that not all sentiment effects are created equal. Using the bounds test of the autoregressive distributed lag (ARDL) models, this paper examines how occupier sentiment versus investor sentiment contributes to the short-run and long-run dynamics of commercial real estate returns in Australia. The empirical evidence suggests that investor sentiment and occupier sentiment influence return asymmetrically after macroeconomic conditions are controlled for. The sectoral analysis further reveals that sector-specific sentiment plays a significant role in explaining commercial real estate returns. Furthermore, notable improvement is found in producing more accurate prediction in returns, given that measures of occupier and investor sentiment are appropriately specified in the forecast. This study is novel in the sense that it acknowledges the impacts of occupiers' and investors' sentiment may be fundamentally different. The unique innovation and contribution of this study to behavioural finance literature are based on a new dataset from the Royal Institute of Chartered Surveyors which includes a survey-based measure of investor sentiment and occupier sentiment.

Keywords: Occupier sentiment, investor sentiment, commercial real estate, Autoregressive Distributed Lag (ARDL) models, bounds tests, predictability; behavioural finance

JEL Classification: G40, R33, G17

Suggested Citation

Cheung, William Ka Shing and Lee, Joshua, The Effect of Sentiment on Commercial Real Estate Returns: Investor and Occupier Perspectives (January 15, 2021). Cheung, K.S. and Lee, J. (2021), "The effect of sentiment on commercial real estate returns: investor and occupier perspectives", Journal of Property Investment & Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JPIF-01-2020-0010, Available at SSRN: https://ssrn.com/abstract=3774546

William Ka Shing Cheung (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Joshua Lee

affiliation not provided to SSRN

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