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
Date Written: January 15, 2021
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: Suggested Citation