The main risk factors for residential properties in the Paris area over the 1973-1978 period are identified using a Principal Component Analysis as well as a Stepwise WLS Regression Method. The first method indicates that linear or log-linear combinations of factors such as interest rates, interest rate spreads, equity market returns, rents, unemployment, or even market traded real estate cannot wholly capture physical real estate return risk. The second method indicates it is nevertheless possible to derive a factor model for real estate risk, and that the consistent factors are rents, unemployment, and listed real estate. Comparisons of our factor model index with the IPD index and the Notaires/INSEE square-metre price index, as well as statistical probe of the database, yield interesting implications concerning real estate risk, market participant behaviour, and the nature of the so-called 1990's "speculative bubble".
BARONI, M., BARTHELEMY, F. and MOKRANE, M. (2001). Physical Real Estate: Risk Factors and Investor Behavior. ESSEC Business School.