A Fundamental Comparison of International Real Estate Returns

Abstract

This study analyzes commercial real estate returns in Australia, Canada, the United Kingdom and the United States over the period 1985-95, from the perspective of a U.S. investor. Because national indices can consist of differing property mixes, this study separately analyzes the office, retail and warehouse sectors. Moreover, these analyses also convert total returns into their fundamental components: initial yield, growth in income and shifts in capitalization rates. The paths of currency-adjusted income and asset values and, therefore, capitalization rates are also presented. Generally speaking, the fundamental components of retail returns across the four countries exhibit greater divergence than the office and warehouse sectors. It is interesting that the U.S. property sectors showed the worst performance, while the Australian retail and the British office and warehouse sectors were the best performers (both before and after currency adjustments). Additionally, the currency-adjusted Australian returns were adversely effected by exchange rate movements, while the British returns were positively effected. Lastly, the correlation of the quarterly percentage change in income was generally lower and less statistically significant than the correlation patterns observed among the other components of return. This might suggest that more idiosyncratic risk can be found in the real estate space markets (as proxied by income changes) than in the real estate capital markets (as proxied by the pricing of the income—that is, capitalization rates), which appear to be more globally influenced.