Searching for yield in real assets

Velez, Tara Michelle (2017) Searching for yield in real assets. Doctoral thesis, Birkbeck, University of London.

Abstract

Three empirical chapters addressing investments in real, alternative assets are presented in this thesis. Chapter 2 focuses on fine art as an investment. In recent years, the art market has been characterized by final auction prices greatly exceeding the exante estimates published by international auction houses. We define this difference as a rarity premium and build a ‘Rarity Index’ by aggregating the premia relative to the mean. We also investigate the benefits, outside financial performance, associated with art ownership and introduce the term of ‘ownership yield’, meant to encapsulate both aesthetic yield and features of conspicuous consumption. This ownership yield may account for the large differences between the values of rarity indexes we construct for three famous families of paintings over the period 2003 to 2013. In Chapter 3, we turn our attention to residential real estate in alpha cities. We argue that relative price changes in prime property markets have greatly deviated from non-prime markets on a national level, while similarities across prime markets in different countries have increased. In order to illustrate the extent of these changes, we introduce a novel ‘luxury ratio’ and perform several statistical analyses on repeat-sales price indexes over the period 2003 to 2014. Taking the case of London, we show how the luxury ratio has evolved over the past two decades with respect to other UK cities. Results support the existence of an ownership yield in a world where high (and ultra-high) net worth individuals are growing in number and search for exclusiveness through the possession of distinctive residential property. Chapter 4 targets two types of commercial real estate: data centers and shopping complexes (companies specializing in malls, shopping centers, and outlets). First, with price indexes based on US REITs, we analyze short-term and long-term relationships between the S&P 500 and several commercial real estate categories using Engle-Granger cointegration over the period 2009 to mid-2016. We find no cointegration between data centers and the S&P 500, or retail (representing shopping complexes) and the S&P 500, indicating that both sectors are not merely an attractive investment in their own right, but also portfolio diversifiers. Second, turning to individual firms, we perform a CAPM analysis of 41 international companies. Results show that, on average, price returns from data centers surpass those of shopping complexes; moreover, US companies specializing in malls, shopping centers, and outlets outperform those of similar firms abroad. Finally, we indicate a further avenue for data centers in relation to electricity storage, and explain implications for investors.

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