Market liquidity conditions and rental growth are said to match along “hot” and “cold” market cycles over time. Substantial deviations from these phases explain either overrented or underrented expectations by landlords or an essential change in tenants’ housing demand. While the assessment of housing markets by central banks, governments, institutional brokers and private households focus nowadays primarily on price indices, a general liquidity indicator and its potential co-movements along the residential cycle is missing. This paper develops a theoretical model and empirically explores a new form of market equilibrium in which liquidity and rental indices determine residential market cycles. The results with big data capture the development of 250 German residential markets accurately and show that markets do develop across cycles over time, but not always along the “hot” or “cold” phases as described by Krainer, 1999. The paper also explores the results spatially across the strong segmented German rental housing market.

1. PATRIZIA Immobilien AG
PATRIZIA Bürohaus | Fuggerstraße 26 | 86150 Augsburg | T +49 821 50910-000 | F +49 821 50910-999 | immobilien@patrizia.ag | www.patrizia.ag
Understanding real estate markets with big data – Liquidity and
rental co-movements in Germany
ERES Conference 2017
Dr. Marcelo Cajias
The author especially thanks PATRIZIA Immobilien AG for contributing
the dataset to conduct this study. All statements of opinion reflect the current
estimations of the author and do not necessarily reflect the opinion of
PATRIZIA Immobilien AG or its associated companies.

2. 2PATRIZIA Immobilien AG| © 2017
Market liquidity and rental growth match along market cycle
⧫ Real estate price indices are common indicators used by central banks, governments or institutional brokers in
order to assess the price or rental development.
⧫ A standardized indicator that proxies the current market liquidity conditions is not existent.
Hypothesis: the residential price index does reflect in fact general market conditions but a residential liquidity
indicator is essential when assessing possible market movements and frictions.
Real estate
price index
Real estate
price index
Time Time
Strong
Liquidity ?
Strong
Liquidity ?
?

3. 3PATRIZIA Immobilien AG| © 2017
Liquidity
conditions
Four theoretical co-movements between liquidity and rental indices
are possible
Rental
development
Up
0
Down
0 UpDown
Hot state
Cold state
Overrented state
Underrented state
Expected relationship
⧫ Rising real estate values, strong demand
levels and consequently by high transactions
➔ Hot markets
⧫ Fall in real estate values, the demand for
dwellings is poor and transaction plunge
➔ Cold markets
Market frictions
⧫ Higher liquidity levels along a rental cycle
with constrained rental growth
➔ rents underreact to rising liquidity
➔ Underrented state
⧫ Rental growth supported by worsening
liquidity levels
➔ overreaction of rents not driven by rising
liquidity
➔ Overrented state
Co-movements between liquidity and
rental indices within a cycle
Description of co-movements

4. 4PATRIZIA Immobilien AG| © 2017
Rents and liquidity conditions are apparently related (i)
Time-on-market in weeksAsking rents in €/m²/p.a.
2013Q1
2013Q1
2016Q3
2016Q3

5. 5PATRIZIA Immobilien AG| © 2017
Rents and liquidity conditions are apparently related (ii)
Time-on-marketinweeks
Asking rents in €/m²/p.a. Asking rents in €/m²/p.a.
Time-on-marketinweeks
2013 Q1 2016Q1

6. 6PATRIZIA Immobilien AG| © 2017
Econometric approach employs advanced regression techniques
Data description X
⧫ 1’801’587 observations of rental flats from multiple
listing services (MLS) in Germany from 2013-Q1 until
2016-Q3 (Empirica Systems).
⧫ Two socioeconomic variables: purchasing power per
household and number of households (GfK databank)
⧫ Two spatial gravity indicators: Euclidian distance of
each dwelling to the geographical centroid to the ZIP
and NUTS3 polygon in kilometres (ArcGIS).
⧫ Dwellings’ atypicality and degree of overpricing as
defined by Haurin’s 1988.
⧫ 11 relevant hedonic characteristics.
⧫ 250 NUTS3 areas (=markets)
Data description Y
⧫ Asking rents in log €/m²/p.m. ➔ R
⧫ Time-on-market of dwelling. ➔ ǁt
Econometric approach
⧫ Estimate a loglin rent and a CoxPH survival pooled
cross-sectional regressions for each market (1,..,
250):
⧫ Extract the time-dummies coefficients and obtain the
time-dummy-indices for rents and liquidity:
⧫ Plot the results as scatterplots with ෠θ and ෠δ and track
changes over time.
i = dwelling;
j = ZIP-area-specific covariates;
t = time;

7. 7PATRIZIA Immobilien AG| © 2017
Liquidity and rental co-movements show patterns and diverging
developments (i)
Liquidity
conditions
Rental
development
2013Q4 2014Q4 2015Q4 2016Q3
Co-movements
⧫ Liquidity fell in half of the
markets despite rental growth,
pointing to a substantial
underrented state.
⧫ A significant share of the
markets moved at a fast pace
towards the state hot.
⧫ Only a small number of markets
moved around the initial
reference with no clear
intertemporal development.

8. 8PATRIZIA Immobilien AG| © 2017
Liquidity and rental co-movements show patterns and diverging
developments (ii)
Liquidity
conditions
Rental
development
2013Q4 2014Q4 2015Q4 2016Q3
Co-movements
⧫ After two years, German markets
moved in general horizontally
towards rental growth without a
significant rise in liquidity.
⧫ A significant share of markets
moved deeper towards the
underrented state.

9. 9PATRIZIA Immobilien AG| © 2017
Liquidity and rental co-movements show patterns and diverging
developments (iii)
Liquidity
conditions
Rental
development
2013Q4 2014Q4 2015Q4 2016Q3
Co-movements
⧫ Rental growth continued over
practically all markets and
expanded at a much faster rate
as during 2013 and 2014.
⧫ Market liquidity shows a
substantial momentum
compared with the two initial
years.
⧫ A notable share of markets
consolidated through the
overrented state with persistent
falling liquidity levels and rising
rents.

10. 10PATRIZIA Immobilien AG| © 2017
Liquidity and rental co-movements show patterns and diverging
developments (iv)
Liquidity
conditions
Rental
development
2013Q4 2014Q4 2015Q4 2016Q3
Co-movements
⧫ Consistent development of the
German residential markets
through the hot state.
⧫ Just 17 markets continued in the
overrented state.

11. 11PATRIZIA Immobilien AG| © 2017
Common understanding, conclusions and further steps
⧫ A common understanding for liquidity and rental developments in real estate markets is essential
for private, institutional and governmental market players.
⧫ Nowadays, the assessment of housing markets by central banks or governmental institutions is
commonly done by capturing aggregated rental or price indices leaving liquidity conditions behind.
⧫ This paper has proposed a theoretical model for simultaneously capturing co-movements
between liquidity and rental changes.
⧫ The market equilibrium is captured by the marginal change in dwelling’s letting probability from a cox
survival method in contrast to the antilog rental index derived from a time-dummy-approach.
⧫ The model
⧫ identifies co-movements towards liquidity and rental levels;
⧫ shows that a noticeable share of markets are currently showing strong rental growth accompanied
by rising letting activities;
⧫ confirms market frictions with some markets showing abnormal letting activities relative to rental
growth and rising asking rents accompanied by falling letting activities.
⧫ Further steps: model calibration and consideration of lead-lag-effects, socioeconomic information

12. 12PATRIZIA Immobilien AG| © 2017
Contact
Disclaimer
This publication is purely for general information and not a prospectus. The information contained in this report is based on publicly available sources that we believe to be reliable. We cannot guarantee the correctness or
completeness of information. All statements of opinion reflect the current estimations of the author and do not necessarily reflect the opinion of PATRIZIA Immobilien AG or its associated companies. The opinions expressed in this
publication may change without prior notice.
The research reports and presentations (“analyses”) produced by PATRIZIA Immobilien AG contain selected information and cannot be regarded as complete and correct. The analyses are based on publicly accessible information
and data (“information”), which are regarded as reliable. However, PATRIZIA Immobilien AG has not verified the correctness or completeness of the information and does not accept any liability for this. PATRIZIA Immobilien AG will
not bear liability for any damage arising from incomplete or incorrect information, and PATRIZIA Immobilien AG will bear no liability for direct and/or indirect damage and/or secondary damage. In particular, PATRIZIA Immobilien AG
will bear no liability for statements, projections or other details contained in these analyses relating to the companies examined, their associated companies, strategies, economic, market and/or competitive position, legal
conditions etc. Although the analyses are produced with the greatest care, the possibility of errors or incompleteness cannot be eliminated. PATRIZIA Immobilien AG, its shareholders and employees bear no liability for the
correctness or completeness of the statements, estimations, recommendations or conclusions derived from information contained in the analyses. If an analysis is provided as part of an existing contractual relationship, e.g.
financial consultancy or a similar service, liability of PATRIZIA Immobilien AG is limited to gross negligence and intent. If fundamental information is omitted, PATRIZIA Immobilien AG shall be liable for simple negligence. The liability
of PATRIZIA Immobilien AG to compensate for typical and foreseeable damage is limited according to the extent of the damage. The analyses do not represent an offer, or an invitation to submit an offer for the purchase or sale of a
property, a property portfolio, a security or any other investment commitment. The opinions contained in the analyses may change without prior notice. All rights reserved.
PATRIZIA Immobilien AG has taken internal organization and regulative precautions to avoid possible conflicts of interest and to disclose these when they arise.
DR. MARCELO CAJIAS
ASSOCIATE DIRECTOR
PATRIZIA Immobilien AG
PATRIZIA Bürohaus
Fuggerstraße 26
86150 Augsburg
T +49 821 50910-662
F +49 821 50910-679
M +49 151 17215198
marcelo.cajias@patrizia.ag
www.patrizia.ag