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A Test of a Buying Rule for “Underpriced” Apartment Buildings
Author(s) -
Londerville Jane
Publication year - 1998
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00756
Subject(s) - real estate , apartment , economics , econometrics , property value , sharpe ratio , actuarial science , hedonic regression , test (biology) , value (mathematics) , property (philosophy) , financial economics , mathematics , statistics , finance , portfolio , engineering , paleontology , philosophy , civil engineering , epistemology , biology
Apartment‐building repeat‐sales data are used to test a trading rule. Property values are estimated through regression; if the actual price is less than the estimated value, the property may be “undervalued.” Returns are calculated for these “undervalued” properties and adjusted for risk using the Sharpe ratio. A test is done of whether these ratios are significantly different for different portfolios. The “undervalued” properties have higher appreciation returns, but once these are adjusted for risk, the differences in returns are not significant. The paper contributes to the real estate efficiency literature and suggests a workable method for comparing the performance of real estate portfolios on a risk‐adjusted basis.