Authors: Liang Peng and Thomas G. Thibodeau
Not really. This paper compares the unlevered returns on value added and core investments of private commercial real estate equity in the National Council of Real Estate Investment Fiduciaries (NCREIF) database. We use capital expenditures on building improvements to identify value added investments, and use a difference in differences approach to control for mismatch in holding periods and locations of investments. The results provide no evidence for difference in average returns on value added and core investments, despite higher perceived risk for the former. We also find that value added investments have lower unlevered returns when “value creation” starts in booming real estate markets and when “value creation” costs more, which suggests possible systematic mispricing of the real options embedded in value added investments.