Real Estate Investments, Product Market Competition and Stock Returns

Abstract

By limiting operating flexibility, real estate investments are found to increase firm risk, thus expected returns. This study introduces product market competition as a critical determinant of the relation between real estate investments and stock returns. As part of capacity strategies, these investments are generally associated with increased market power and lower cash flow volatility in oligopolistic industries. I present a simple model of oligopolistic competition showing a negative relation between real estate holdings and firm beta, and empirically confirm this prediction. Controlling for product market competition enhances identification of the endogenous relation between real estate investments and stock returns.

The Impact of Structural Changes on Corporate Real Estate Ownership: Evidence From Germany

“…The published long-term ownership ratios, e.g. for the US or Europe, do not indicate such a pattern (Ghent et al, 2019;Diop, 2018;. In contrast, the recognisably slow and long-term process of ownership adjustments supports more the theory that they are caused by changing structural conditions.…”

“…Figure 1. CRE provision as a continuous process of alignment to the business environment Diop (2018) is also able to show that companies in an environment of low competition have a declining beta value with increasing ownership intensity and, thus, improve their financial performance and achieve a positive effect on operating performance. The opposite effect can be seen in competition-intensive markets.…”

“…An important driver of structural change currently is the increasing intensity of competition. Diop and Ambrose show the high relevance of the intensity of competition in product markets for corporate real estate holdings (Ambrose et al, 2017;Diop, 2013Diop, , 2018. Where competition is low, high shares of CRE overcapacity can help nonproperty companies expand their production and reduce the potential profits of companies considering market entry.…”

The effect of corporate real estate ownership on R&D innovation: credit relief vs. resource replacement in China

“…On this basis, further studies find that competition incentivises innovation activities among Chinese private enterprises, but not among state‐owned enterprises, collective enterprises, and foreign‐funded enterprises. As mentioned above, the literature on industry organisations contends that oligopoly industries can obtain potential benefits from the real estate industry, such as market protection, cash flow stability, and bargaining power (Spence ; Eaton and Lipsey ; Tuzel ; Diop ). In other words, to enterprises in a monopolised industry, real estate investment brings more economic benefits than corporate risks, making them more willing to hold real estate (Peress ; Diop ).…”

“…This paper adopts the method of Diop () to calculate the industrial Herfindahl–Hirschman Index ( HHI )—namely the industrial market concentration—and HHI i represents the market concentration of firm i . HHI is divided into five equal parts, from 1 for a competitive industry to 5 for a monopoly industry.…”