Real estate valuation and REITs: an analysis of the hedonic pricing model and its enhancements

The real estate sector plays a crucial role in the global economy, influencing both financial markets and investment strategies. Among the key players in this industry, Real Estate Investment Trusts (REITs) manage real estate portfolios and rely on various valuation methods to assess asset value. One of the most widely used approaches in real estate valuation is the hedonic pricing model, which estimates property values based on intrinsic and extrinsic characteristics. However, integrating this model with the traditional valuation methods adopted by REITs remains a challenge. This research aims to analyse the applicability of the hedonic pricing model in real estate valuation and explore its integration with REITs’ evaluation approaches, including the income approach, market approach, cost approach, and net asset value approach. The study is based on a dataset of real estate transactions from the city of Turin and its metropolitan area, incorporating key variables such as square footage, number of rooms and bathrooms, neighbourhood quality, and other relevant property attributes. Special attention is given to handling ordinal variables and addressing multicollinearity issues. The model found explains more than 77% of the target variable selected as "Valuation MED", which is a good result considering the limited data set available. The findings highlight the strengths and limitations of the hedonic model in real estate valuation. While it proves to be a useful tool, challenges remain in integrating market comparables and qualitative property attributes. Future research could focus on expanding the dataset, incorporating real-time market data, and leveraging machine learning techniques to enhance the model’s predictive accuracy.