Liquidity and real estate asset pricing: a pan-European study

Purpose - Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate equity returns, after accounting for well-documented systematic risk factors. Design/methodology/approach - Based on risk factors derived from general equity data, the authors extend the Fama-French time-series regression approach by a liquidity factor, using a pan-European sample of 272 real estate equities. Findings - The empirical results indicate that liquidity is a significant pricing factor in real estate stock returns, even after controlling for market, size and book-to-market factors. In addition, the authors detect that real estate stock returns load predominantly positively on the liquidity risk factor, suggesting that real estate equities tend to behave like illiquid common equities. These findings are underpinned by a series of robustness checks. Running a comparative analysis with alternative factor models, the authors further demonstrate that the liquidity-augmented asset-pricing model is most appropriate for explaining European real estate stock returns. Research limitations/implications - The inclusion of sentiment and downside risk factors could provide further insights into real estate asset pricing in European capital markets. Originality/value - This is the first study to examine the role of liquidity as a systematic risk factor in a pan-European setting.