International Direct Real Estate Risk Premiums
in a Multi-Factor Estimation Model
David Kim Hin Ho & Kwame Addae-Dapaah &
John L. Glascock
Published online: 3 July 2014

Abstract

We estimate international risk premiums for North and South Asia and US
direct real estate by using a pooled-panel multi-factor least squares model. Data for the
paper are from JLL REIS-Asia and the Russell-NCREIF Property Indexes. Our results,
based on the Geltner and Miller (2007) 1st and 4th order autoregressive de-smoothing
models, affirm the existence of appraisal smoothing in the direct real estate market
returns. Secondly, our findings affirm that the true historical volatility of autoregressive
lagged de-smoothed returns is a reasonable estimate of international direct real estate
risk premiums. Thirdly, we find that changes in macroeconomic and real estate
variables explain the office and retail returns more than the residential returns. There
is also a high vacancy rate risk premium that we attribute to country-specific, institutional
environmental factors. Furthermore, the South Asia direct real estate risk premium
is found to be higher than that for North Asia. Moreover the risk premiums for
North and South Asia are higher than that for the US. Finally, our results show that
appraisal smoothed returns significantly underestimate the international direct real
estate risk premiums for the sampled Asia markets and the US.