Chasing Speculative Returns in the Post Gfc Recovery: Yield vs Price Appreciation in Real Estate Investment Objectives

Authors: Patrice Derrington*, Columbia University
Topics: Development, Economic Geography
Keywords: urban development, speculative investment, trophy properties
Session Type: Paper
Day: 4/11/2018
Start / End Time: 3:20 PM / 5:00 PM
Room: Riverview I, Marriott, River Tower Elevators, 41st Floor
Presentation File: No File Uploaded

The profusion of the trading and development of “trophy” commercial properties and ultra-luxury, super-tall residential buildings in major urban centers globally, during the recovery since the Global Financial Crisis, is notable in capturing so much of real estate commerce with the investment in moderately priced properties relatively weak in volume and price movement. Seeking the underlying reasons for this frenzied activity in the more speculative markets, the nature of real estate returns is examined with the specific parsing of the differences between the annual yields and those returns due to price appreciation. It is found that the more trophy or luxury properties are priced based on anticipated price appreciation underwritten with the more speculative estimates of improving growth rates and reducing investment hurdle rates, typically represented in the Cap Rate metric. While these properties also demonstrated little relationship between trading price and annual returns, other more utilitarian real estate was priced by a firm correlation with the current yields. Furthermore, with yields tracking GDP growth, the early low-growth years of the recovery presented real estate investors with relatively low yields in comparison to the expanding speculative returns to be achieved through a focus on price appreciation potential. Hence, the strong tendency to invest for speculative returns supported the development of those more high-profile buildings even as over-supply became apparent.

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