On the Time‐Series Properties of Real Estate Investment Trust Betas

Abstract

The relation between real estate investment trust (REIT) returns and stock market returns is of significant importance to investors, practitioners and academics. The temporal properties of this relationship have a critical impact on the usefulness of REIT risk estimates and portfolio allocations to this asset class. Recent studies have suggested a decline in the market betas of equity real estate investment trusts (EREITs). This study applies a rigorous statistical test of the hypothesis that the market betas of EREITs have remained unchanged during the 1972 through 2002 time period. There is weak evidence of a downward trend in EREIT betas using a single-factor model; however, the hypothesis is not rejected when using a three-factor model.The stability of a risky security's market beta is important to those who use the estimated coefficient for performance evaluation, event studies, valuation and asset allocation. A number of recent studies have observed an apparent decline in the market betas of equity real estate investment trusts (EREITs). If the decline is of statistical and economic significance, then the implication is that estimates of EREIT betas that rely upon historical returns are biased upward. Although several explanations have been proposed for the apparent decline in EREIT betas, no formal tests for a significant time trend have been conducted. This article rigorously tests the time-series properties of EREIT betas. Related LiteratureMcIntosh, Liang and Tompkins (1991) were the first to detect a decline in EREIT betas during the 1974 through 1983 time period. Khoo, Hartzell and Hoesli (1993) expanded the McIntosh, Liang and Tompkins sample period from 1970 to 1989, and they provided additional evidence of a temporal decline in EREIT betas. Khoo, Hartzell and Hoesli applied a two-sample test for a regime shift under the assumption of time independence. As will be shown below, however,

Real Estate Risk Exposure of Equity Real Estate Investment Trusts

“…The standard deviations of NCR are 1.08, 1.86, and 0.91% per quarter for the 1980-1990 period, the 1991-1992 period, and the 1993-2003 period, respectively. It is not surprising that EXREIT and the stock market factor move fairly together because they are traded on the same platform. Also, consistent with Chiang et al (2005) and Clayton and Mackinnon (2003), this study finds that the correlations between EXREIT and the stock market factor decline after 1993. The correlation coefficients between the two series are 0.8223, 0.8672, and 0.3386 over the three sub-periods.…”

An investigation into REIT performance persistency

“…Consistent with the findings of Peterson and Hsieh (1997), Chui, Titman and Wei (2003b) and Chiang, Lee and Wisen (2005), MKT, SMB and HML all contribute to explaining EREIT returns. The beta coefficients are not substantially different across deciles.…”

The Role of Correlated Trading in Setting REIT Prices

“…The Fama-French three-factor model is selected because Peterson and Hsieh (1997) and Chiang et al (2005) find that the Fama-French factors help to explain REIT pricing and provide time-stable beta estimates. Intuitively, CLOSED is the residual return of traditional closed-end stock/bond funds after their fundamentals and factor exposures are purged via the regression in Eq.…”