It is well-known that bank lending and bank performance have been strongly affected on frequent occasions by asset price fluctuations, at times culminating in banking crises. Among various key assets, commercial real estate is of special interest, not only because commercial property loans are an important component of bank assets, but also because of the widespread use of commercial property as collateral of other types of loans. Whereas there is a fairly extensive literature on the relation between bank lending and commercial property prices at a macro level (see recent work and a literature survey in a companion paper by Davis and Zhu (2004)), there is much less extant work on the impact of commercial property prices on the lending decisions, risk and profitability of individual banks. Evidence of a clear and consistent link to bank performance would underline the importance of commercial property prices as a key macroprudential indicator, as well as being relevant to the monetary transmission process.
Built on the foundation of economic principles, real estate offers many pursuits of academic discovery within the realm of finance. This dissertation examines three areas of real estate finance. In the first chapter, I use the unique real estate characteristics of heterogeneity, immobility, and localized markets to examine the spatial aspects of large-scale commercial real estate portfolios. The results demonstrate a clear need for portfolio managers to diversify properties based upon distances between properties. The second chapter examines another large-scale real estate portfolio, the real estate investment trust, which is held by investors seeking dividend income. Despite the importance of dividend payouts to investors, current real estate literature does not fully explain the dividend policy of REITs. I find that REITs base dividend payouts on contemporaneous earnings, the level of dividends paid last period, and firm volatility. For real estate investors that desire income based upon debt instruments, the last chapter examines the prepayment and default of mortgage instruments using credit scoring. I address the research question of how credit scoring affects mortgage pricing. The findings indicate a need to include credit scores as a state variable in a mortgage option pricing model. Overall, each chapter furthers our understanding of real estate finance.
Non government real estate is a $22 trillion asset category, which exceeds the size of other common asset categories such as corporate equities (13 trillion), government debt (7 trillion), and mortgage debt (8 trillion). The magnitude of the market offers numerous avenues for real estate research. I explore three in this dissertation.
Whenever a crisis hits, interest in guarantee arrangements rises. The current financial crisis is no exception in that respect. It puts the spotlight on the operation of the financial safety net and provides policy makers with a timely opportunity to monitor its performance, with a view to identifying its strengths and weaknesses. The present note focuses on the way parts of the financial safety net are combined, putting special emphasis on deposit insurance and its interaction with other safety net elements. While it also includes a discussion of recent policy actions in that context, the note centres on structural rather than practical crisis resolution issues.
At its meeting in March 2008, the OECD Committee on Financial Markets (CMF) discussed selected financial safety net issues within the Tour d’Horizon on Financial Markets based on a background note prepared by the Secretariat. The note highlighted the importance of various aspects of the design of financial safety nets and in particular of explicit deposit insurance systems. It argued that it was too early to draw any strong policy lessons from recent developments regarding the effects of the turbulence and the adequacy of the financial safety net, but that some preliminary lessons were emerging concerning selected aspects of the design of deposit insurance systems. These included that, as regards coverage, deposit insurance systems with low levels of coverage and/or partial insurance may not be effective in preventing bank runs.
