Investment returns of US commercial timberland: insights into index construction methods and results

This study compares different index construction methods of timberland investment returns and evaluates the resulting indices by various asset pricing models. In addition to various NCRIEF indices, I include a de-smoothed index that attempts to restore property market values, a transaction-based index that tracks ex post transaction prices, and a pure-play index that is based on unleveraged returns of public timber firms and only has exposures to the timber segment. The findings are that the appraisal-based timberland index has higher mean and lower volatility compared with the transaction-based timberland index, separate accounts outperform comingled funds in the private timberland market, the pure-play timberland index exhibits higher return and lower risk than the corresponding portfolio of public timber firms, and abnormal performance of timberland asset becomes less significant after controlling for the appraisal smoothing or by using real transaction data. These results can help timberland investors better benchmark their financial performance.

The risk and return of farm real estate and the “bad data problem”

Purpose – The purpose of this paper is to explore the consequences of appraisal smoothing in the estimation of the risks and returns of farm real estate. It examines the degree to which the risk and return characteristics of farm real estate are an artifact of the methods used to measure aggregate property values. Design/methodology/approach – A multifactor asset pricing model is estimated using farm real estate returns in a manner consistent with prior research, as well as using farm real estate returns calculated using two synthetic unsmoothing procedures developed in the real estate finance literature. Findings – The model suggests that unsmoothed farm real estate returns exhibit characteristics that differ from those suggested by prior research. The unsmoothed returns suggest a stronger correlation with economy wide investment risks. Originality/value – This is the first study to evaluate the impacts of appraisal smoothing in a farm real estate context. It provides a simple framework for addressing many of the pricing anomalies associated with farmland.

International Real Estate Review

This paper contributes to the debate about capitalization rate determinants by comparing the driving factors of appraisal-based cap rates with those of transaction-based cap rates. By using a rich database of real estate transactions in Switzerland for the period of 1985¡V2010, we identify several property-specific variables that have not been used in prior research and that increase the explained portion of the cap rate variance by as much as 10 percentage points. The results show that compared to investors, appraisers overweight factors that they can easily observe when they appraise a property, at the cost of variables related to growth expectations and the opportunity cost of capital. This has two implications. First, as the easily observable factors hardly change over time, while the latter variables change frequently and significantly, it provides new evidence that may add to the appraisal-smoothing discussion. Second, investors put less emphasis on factors that are diversifiable, which suggests that they favor a portfolio perspective, whereas the focus of the appraisers is more on the individual property level.