NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investor Rationality: Evidence from UK Property Capitalization Rates

Patric H. Hendershott, Bryan D. MacGregor

NBER Working Paper No. 9894
Issued in August 2003
NBER Program(s):   PE

Recent analyses have suggested the irrationality of investors in Australian and U.S. office properties. More specifically, investors have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this paper we analyze the determination of UK office and retail capitalization rates and provide evidence that these rates reflect rational expectations of mean reversion in future real cash flows. Moreover, these rates are linked to capitalization rates (dividend/price ratio) and expected dividend earnings growth as expected.

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Published: Hendershott, Patric H. and Bryan D. MacGregor. "Investor Rationality: An Analysis Of NCREIF Commercial Property Data," Journal of Real Estate Research, 2005, v27(4,Oct/Dec), 445-471.

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