TITLE:
Japanese Private Real Estate Models and Portfolio Selection
AUTHORS:
Koichi Miyazaki, Kazuhiro Shimada
KEYWORDS:
Real Estate, Low Liquidity, De-Smoothing, Most Likelihood Estimation
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.13 No.3,
July
5,
2023
ABSTRACT: Private real estate is attracting attention as one of the alternative investment assets from the viewpoint of high income gain and its low correlation with traditional assets due to low liquidity. The prices of privately placed real estate are mainly based on “appraisal prices” by real estate appraisers. The return of private real estate has autocorrelation due to the smoothing effects of appraisals, and therefore, appropriate de-smoothing, which removes the autocorrelation out of the return is necessary for practical use. However, even though it is de-smoothed, the return is still based only on appraisal prices, so it cannot be said to be based on prices actually traded in the private market. Hereinafter, the return based on prices actually traded in the private market is referred to as “transaction-based prices”. To solve the issue, we propose a modeling of mean and variance of the transaction-based return for privately placed real estate, using both the de-smoothed returns of privately placed real estate (private but not actually traded price information) and the J-REIT returns obtained from the listed market (actually traded price but not private information).