German Real Estate Return Distributions: Is There Anything Normal?

Risk measures for direct real estate investments with non-normal or unknown return distributions

“…Thus, the authors stated, that standard risk measures are inapplicable for direct real estate investments. Using the same methodology studies in other countries support this conclusion (Young (2008) in the US, Graff et al (1997) in Australia, Young et al (2006) in the UK, and Richter et al (2011) in Germany). Brown and Matysiak (2000) were the first to analyse return distributions of individual properties.…”

“…The authors found that the assumption of normal distribution can be rejected for virtually all subsamples of all property-types and for all years. Nonetheless, Richter et al (2011) noted that the kurtosis values of the income returns were less pronounced than those for the capital returns, due to the stable nature of rental income compared with capital values. Stein et al (2015) used global IPD data for their study.…”

“…Regarding German real estate returns three studies have examined their distribution: Maurer et al (2004), and Richter et al (2011) and Stein et al (2015). Maurer et al (2004) argued that the IPD index history is relatively short and so only allows for analyses of annual returns.…”

“…When further accounting for smoothing of real estate returns as well as for inflation, they found that normality of quarterly and yearly returns could not be rejected in both cases. Richter et al (2011) used data from the IPD on 8938 individual German properties from 2000 to 2009 and tested the normality of total returns, capital returns, and income returns for three property-types-retail, office, and residential. The authors found that the assumption of normal distribution can be rejected for virtually all subsamples of all property-types and for all years.…”

“…1 In particular, Webb and Pagliari (1995) identified various reasons why volatility as a risk measure for real estate should be seen with some scepticism: the poor quality of the direct real estate data, the cyclicality of real estate returns, high transaction costs, and appraisal-based returns which lead to unrealistic volatility values for direct real estate compared with stocks and bonds. In addition, recent studies have provided evidence that real estate returns are not normally distributed which invalidates the standard deviation as an appropriate measure of risk (see, King and Young 1994;Young and Graff 1995;Graff et al 1997;Brown and Matysiak 2000;Maurer et al 2004;Young et al 2006;Morawski and Rehkugler 2006;Young 2008;Richter et al 2011;among others).…”