Estimating Quality Adjusted Commercial Property Price Indexes Using Japanese REIT Data

The paper proposes a new method to estimate quality adjusted commercial property price indexes using real estate investment trust (REIT) data. The method is based on the present value approach, but the way in which current operating income and the capitalization rate are estimated differs from the traditional method. The traditional method uses a hedonic regression with appraisal information on properties as the dependent variable in order to estimate the capitalization factor. We compare this method with a method that replaces appraisal information with stock market valuations (adjusted for debt). We also run alternative hedonic regressions, restricting the sample of properties to those which are associated with new rental contracts, which may contain more information on future cash flows from properties. Using a dataset with prices and cash flows for about 400 commercial properties included in Japanese REITs for the period 2001 to 2013, we find that our price index signals turning points much earlier than an appraisal-based price index. Our results suggest that the share prices of REITs provide useful information in constructing commercial property price indexes.