Brazilian REITs Performance: An Analysis of Higher Moments and Time Scales Influence

Abstract

Real Estate investments have been used to provide diversification without increasing portfolio risk, although direct real estate investment has several disadvantages, such as low liquidity and high transaction costs, and Real Estate Investment Trusts (REITs) are an alternative investment aim to overcome these difficulties. This paper analyzes the REITs performance, comparing it to Ibovespa (proxy of market) and Ifix (Brazilian REITs proxy). For a better analysis we used the wavelet method, that allows to compare the results of different scales of time. Analyzing the wavelet transform, the REITs have significant coefficients when compared to the market, index Ibovespa, but considering the relationship between the REITs and the real estate funds, Ifix, influence happens in the long run. Market volatility has a negative effect in REITs returns in the long run, probably because a REITs investor tries to avoid risk. That's because maybe in the long run, REITs investors can change their investments to direct Real Estate if those are presenting better returns, what would reduce REITs demand and consequently, their price. It was noted that REITs returns are influenced by Real Estate companies returns in different scales, indicating that Brazilian REITs returns depend on market volatility. In a general way, this study showed that the relationships between REITs returns, Real Estate Companies returns and Market returns depend on the time scale analyzed, but they tend to be stronger at large scales. Differently of what was found by Milani and Ceretta (2014), Brazilian REITs returns can be better explained by Real Estate Sector Companies returns than by market returns, in the long run. Also, higher moments influence their returns and should be part of a model that tries to explain REITs returns.