The risk of real estate ownership: evidence from German equities

Purpose– This paper aims to investigate the repercussions and impact of corporate real estate on the returns of non-real-estate equities in a time-series setting. While the ownership of real estate constitutes a considerable proportion of most listed firms’ balance sheet, in the existing literature, whether or not the benefits outweigh the risks associated with corporate real estate, is the subject of controversy.Design/methodology/approach– The role of corporate real estate ownership in the pricing of returns is examined, after taking well-documented systematic risk factors into account. Employing a data sample from 1999 to 2014, the conditions and characteristics faced by firms with distinct levels of corporate real estate holdings are identified and analyzed.Findings– The findings reveal that corporate real estate intensity indeed serves as a priced determinant in the German stock market. Among other results, the real-estate-specific risk factor shows countercyclical patterns and is particularly relevant for companies within the manufacturing sector.Practical implications– The findings provide new insights into the interpretation of corporate real estate and expected general equity returns. Thus, the present analysis is of particular interest for investors, as well as the management boards of listed companies.Originality/value– To the best of the author’s knowledge, this is the first paper to investigate the ownership of corporate real estate as a priced factor for German equities, after accounting for the well-documented systematic risk factors, namely, market (market risk premium), size (small minus big) and book-to-market-ratio (BE/ME) (high minus low).