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A Regime‐Switching Approach to Modeling Rental Prices of U.K. Real Estate Sectors
Author(s) -
Füss Roland,
Stein Michael,
Zietz Joachim
Publication year - 2011
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/j.1540-6229.2011.00316.x
Subject(s) - renting , real estate , economics , sample (material) , econometrics , nonlinear system , microeconomics , monetary economics , finance , physics , engineering , thermodynamics , civil engineering , quantum mechanics
This article uses regime‐switching models of the threshold type to analyze the adjustment process of rental prices for three U.K. commercial real estate sectors over the period 1974–2008. The nonlinear models outperform their linear counterparts in in‐sample fit. Their out‐of‐sample forecasting ability is better whenever the corresponding linear models contain a significant amount of neglected nonlinearity. Regime switches are triggered when the growth rates of rental price exceed certain threshold levels. For the industrial and retail sectors such regime switches occur in situations of strong excess demand, for the office sector they occur when there is strong excess supply.