The risk and return of farm real estate and the “bad data problem”

Abstract

Purpose – The purpose of this paper is to explore the consequences of appraisal smoothing in the estimation of the risks and returns of farm real estate. It examines the degree to which the risk and return characteristics of farm real estate are an artifact of the methods used to measure aggregate property values. Design/methodology/approach – A multifactor asset pricing model is estimated using farm real estate returns in a manner consistent with prior research, as well as using farm real estate returns calculated using two synthetic unsmoothing procedures developed in the real estate finance literature. Findings – The model suggests that unsmoothed farm real estate returns exhibit characteristics that differ from those suggested by prior research. The unsmoothed returns suggest a stronger correlation with economy wide investment risks. Originality/value – This is the first study to evaluate the impacts of appraisal smoothing in a farm real estate context. It provides a simple framework for addressing many of the pricing anomalies associated with farmland.