Real Estate Investment Liquidity

This paper explores liquidity aspect in real estate investment. The research draws upon comparison between real estate investment and stock investment, risk and rate of return of real estate investment are adjusted for its illiquidity premium, the methodology of adjusted performance evaluation is inferred. The mathematical expressions, building in certain distribution assumptions, are given for adjusted real estate investment rate of return, risk and investment performance. After the performance evaluation models are constructed by taking liquidity impacts into consideration, they are applied on China Shanghai Real Estate Composite Index (CSRE Index) and China Shanghai Stock Composite Index (CSS Index); various scenarios with different liquidities are analyzed, an equilibrium value, which gives real estate investment and stock investment close performance, is calculated. Based on this threshold, real estate investment is benchmarked against stock investment.There are 5 chapters in this paper:In chapter 1, theoretical research is performed to support this paper. Issue is raised; this research's background and goal are introduced; breakthroughs and framework of this research are discussed. It also includes a review of past real estate investment liquidity researches from domestic or international, their shortcomings or omissions are discussed.In chapter 2, liquidity characteristics associated with real estate are summarized and analyzed. Liquidities associated with real estate investment and stock investment are described qualitatively and quantitatively. After defining the "Time on Market" in the real estate transactions, it uses this variable to measure the illiquidity of real estate. Under a series of assumptions, mathematical attributes of time on market are described.In chapter 3, the model is built and adjusted for the liquidity. Traditional methods are employed to measure stock's risk and return. "Wait and sell" and "instantly sell" scenarios are analyzed to evaluate the illiquidity impacts on risk and return of real estate investment, which leads to the real estate investment performance evaluation models.In chapter 4, empirical study is conducted. Last 10 year CSRE index and CSS Index datum are analyzed using two models described in last chapter. The final result is proved to be that illiquidity increases real estate risk, which can be mitigated by a longer holding period. Illiquidity, increased to certain level, may eliminate all the advantages of real estate investment. Real estate investment no longer enjoys material advantages if selling time excesses nine months.In chapter 5, the final conclusion is drawn. The author also points out some limitations and further improvement of this research. A few suggestions are given for relevant institutions and upcoming researchers.