How Does Appraisal Smoothing Bias Real Estate Returns Measurement?

Edelstein, Robert H.; Quan, Daniel C.

doi:10.1007/s11146-005-5177-9

Cited by 56 publications

(33 citation statements)

References 29 publications

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“…This leads to a moving average of current and past value estimates, which by definition, creates serial correlation and hence the smoothing effect. After the development of the partial adjustment model by Blundell & Ward (1987), Geltner (1989Geltner ( , 1991 and Quan & Quigley (1989, 1991, many authors have found empirical support for appraisal smoothing (Matysiak & Wang, 1995;Diaz & Wolverton, 1998;Fisher & Geltner, 2000;Clayton et al, 2001;Edelstein & Quan, 2006;Cannon & Cole, 2011).…”

Section: Introductionmentioning

confidence: 99%

“…Econ and MicMacG, have overall a relative importance of about 14% for appraisers and 27% for investors. Given this finding, it is not surprising that appraisal-based real estate indices have been found to be smoothed (Matysiak & Wang, 1995;Diaz & Wolverton, 1998;Fisher & Geltner, 2000;Clayton et al, 2001;Edelstein & Quan, 2006;Cannon & Cole, 2011). As appraisers underweight variables that change over time at the cost of variables that hardly change over time, it seems plausible that appraisal-based values are smoother than transaction prices.…”

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confidence: 99%

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Transaction-Based and Appraisal-Based Capitalization Rate Determinants

Chaney¹,

Hoesli

2012

SSRN Journal

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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 1985-2010, 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.

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Section: Introductionmentioning

confidence: 99%

mentioning

confidence: 99%

Transaction-Based and Appraisal-Based Capitalization Rate Determinants

Chaney¹,

Hoesli

2012

SSRN Journal

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“…Third, revised values to private equity and venture capital generally are triggered by the addition of new investor capital to the portfolio company-and remain at cost until the next round of financing. Finally, Edelstein and Quan [2006] and Geltner, MacGregor, and Schwann [2003] showed that real estate values are typically based on appraisal values that, in turn, are based on historical, not current, values.…”

Section: Measuring Liquidity Premiums For Illiquid Assetsmentioning

confidence: 99%

Measuring Liquidity Premiums for Illiquid Assets

Anson¹

2017

JAI

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“…the market 22 For example, this is assumed in Barkham and Geltner (1994). Edelstein and Quan (2005) empirically research the relation between smoothing levels in series for individual properties and indices for real estate markets. Edelstein and Quan (2005, p. 5) state: "To the best of our knowledge, no one has statistically modeled and quantified the effects of aggregation errors upon real estate rates of return indexes."…”

Section: The Bond and Hwang-proceduresmentioning

confidence: 99%

Correction Procedures for Appraisal-Based Real Estate Indices

Gohs¹,

Geltner²,

Pollakowski³

2017

24th Annual European Real Estate Society Conference

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This study reviews and critically discusses correction-procedures (also called "unsmoothing-procedures") for appraisal-based indices.Indices tracking values of direct commercial real estate investments are traditionally constructed in an "appraisal-based style" : Since transactions and corresponding prices of individual properties are scarce, values from regular intervals of appraisals for each "index property" are taken for index calculation. Alas, appraisal-values neither necessarily match transaction-prices nor true market values of properties. Instead, they can deviate from market-values due to biases, which arise in appraisals and index construction processes. In the past, some scientific authors suggested to correct (or "unsmooth") appraisal-based indices from several types of biases. They claim that the corrected index returns should rather match the returns of true market values than the original index returns.Primarily, appraisal-based real estate indices were calculated and published for the USA and UK. Those countries are considered as convenient target markets for investors. Due to its early launch, nowadays one long series of an appraisal-based index, which is available and appropriate for time series analysis, is the NCREIF Property Index for U.S.-properties. The 'total' index is composed of an 'income' and a 'capital' (or 'appreciation') component. So the focus of this study is in an application of the correction procedures on the NCREIF Appreciation Index. The techniques of the correctionprocedures are discussed referring to the NPI. Also meaningful modifications are proposed for the correction procedures.

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How Does Appraisal Smoothing Bias Real Estate Returns Measurement?

Cited by 56 publications

References 29 publications

Transaction-Based and Appraisal-Based Capitalization Rate Determinants

Transaction-Based and Appraisal-Based Capitalization Rate Determinants

Measuring Liquidity Premiums for Illiquid Assets

Correction Procedures for Appraisal-Based Real Estate Indices

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