The Composition of the Market Portfolio and Real Estate Investment Performance

Liu, Crocker H.; Hartzell, David; Grissom, Terry; Greig, Wylie

doi:10.1111/1540-6229.00509

Cited by 35 publications

(15 citation statements)

References 14 publications

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“…7These results are consistent with Liu, Hartzell, Grissom and Greig (1990) who find that six of their 18 equity REITs earned excess returns in the 1978-86 period.…”

Section: Discussionsupporting

confidence: 72%

Risk and Return on Real Estate: Evidence from Equity REITs

Chan

Hendershott

Sanders

1990

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We analyze monthly returns on an equally weighted index of eighteen to twenty-three equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973-87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs.Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60% of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation. Disciplines Business | Economics | Public Affairs, Public Policy and Public AdministrationThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/bepp_papers/3 ABSTRACTWe analyze monthly returns on an equally-weighted index of 18 to 23 equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973-87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs.Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60 percent of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.

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“…7These results are consistent with Liu, Hartzell, Grissom and Greig (1990) who find that six of their 18 equity REITs earned excess returns in the 1978-86 period.…”

Section: Discussionsupporting

confidence: 72%

Risk and Return on Real Estate: Evidence from Equity REITs

Chan

Hendershott

Sanders

1990

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“…Many studies have simply presented analyses of appraisal-based returns without correcting for the effect of smoothing (e.g., Brueggeman, Chen, and Thibodeau, 1984;Miles and McCue, 1984;Miles, 1986, 1987;Hartzell, Shulman, and Wurtzebach, 1987). Other studies have attempted to correct for appraisal smoothing by developing simulated returns series, either by applying cap rate time series to real estate income time series (e.g., Firstenburg, Ross, and Zisler, 1988;Wheaton and Torto, 1989;Liu, et al 1990), or by using so-called "transactions driven" indices of real estate returns based on hedonic models of real estate fundamental value (e.g., Hoag, 1980;Miles, Cole, and Guilkey, 1990). But these simulated returns inevitably contain considerable noise since the cap rates or hedonie models employed to generate the returns are subject to error?…”

mentioning

confidence: 99%

Smoothing in appraisal-based returns

Geltner

1991

J Real Estate Finan Econ

359

151

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This article presents a conceptual analysis of smoothing in the second moments of appraisal-based returns series in commercial real estate. The intent of the article is to lay the groundwork necessary for the more scientific use of appraisal-based returns time series for the purpose of inferring the true second moments. Formal smoothing models are presented together with their theoretical implications for smoothing in various second moments of interest to investment analysts. Empirical estimators for inferring true moments from appraisal-based data are described. Limited empirical findings from previous literature are also briefly discussed in the light of the theoretical findings of this study. The overall conclusion is that appraisal-based returns can be very useful in studying the risk characteristics of commercial real estate assets, provided that this type of data is corrected for smoothing as discussed in the article.The ever-growing quantity of appraisal-based time series of real estate returns represents an increasingly important database for the study of the risk and returns characteristics of investment grade commercial real estate. But while such data are a rich source of information, they are a source that must be used carefully. The differences must be recognized between appraisal-based returns and the true market returns which represent the fundamental economic opportunity costs to investors and which are more directly comparable to the returns studied for alternative investments such as stocks and bonds. These differences drastically affect the risk characteristics of the returns so that the direct unadjusted use of appraisal-based data can be quite misleading. The differences between appraisal-based and true returns bias not only the volatility but virtually all the statistics about the returns that are of interest to investment and portfolio analysts, including the mean of the return, the systematic risk or hedging ability measured by covariances with exogenous indices, and the intraportfolio covariance or "heterogeneity" among real estate assets.While the problems in appraisal-based returns data have been recognized in much of the past literature, attempts to deal effectively with these problems have been less than successful. Many studies have simply presented analyses of appraisal-based returns without correcting for the effect of smoothing (e.g., Brueggeman, Chen, and Thibodeau, 1984;Miles and McCue, 1984; Miles, 1986, 1987;Hartzell, Shulman, and Wurtzebach, 1987). Other studies have attempted to correct for appraisal smoothing by developing simulated returns series, either by applying cap rate time series to real estate income time series (e.g.

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“…Domestic segmentation between indicated investment markets was confirmed, inter alia, by: Liu et al [18], Gyourko and Keim [24], Okunew et al [25], Ling and Naranjo [26], Lin and Lin (in the case of the selected economies) [22].…”

Section: Literature Reviewmentioning

confidence: 98%

Examination of the International Causal Directions between Rates of Return on the Price Indices of the Selected Real Estate Markets in the CEE Region Using Wavelet Analysis

Kołtuniak

2016

Acta Phys. Pol. A

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The objective of this study is to verify the existence of the spillover effects within the complex system of internationally co-integrated real estate and financial markets in the case of the growth rates of the price indices of the direct real estate and indirect real estate investment markets within the selected national economies in the CEE region and to discuss the time stability of their directions, using research methods with physics and econometrics origins. The article considers the case of potential spillover effects between the Polish and Austrian national economies. Presented results have been obtained using wavelet analysis methods, such as wavelet coherency, wavelet phase difference, and wavelet partial phase difference analyses, enabling to check the indicated stability both in the time and frequency domains and to detect any potential structural changes dates. The results have not confirmed the hypotheses that the directions of the mentioned spillover effects displayed time stability in the examined period (Q4 2004-Q4 2014), which disproves the usefulness of the knowledge of the current directions of the indicated effects in the scope of performing long term investment policy, as well as in the scope of projecting the long term internal housing policies and long term internal macroprudential policies within the complex system.

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The Composition of the Market Portfolio and Real Estate Investment Performance

Cited by 35 publications

References 14 publications

Risk and Return on Real Estate: Evidence from Equity REITs

Risk and Return on Real Estate: Evidence from Equity REITs

Smoothing in appraisal-based returns

Examination of the International Causal Directions between Rates of Return on the Price Indices of the Selected Real Estate Markets in the CEE Region Using Wavelet Analysis

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