Determining Real Estate Betas for Markets and Property Types to Set Better Investment Hurdle Rates

Abstract

Executive Summary. Corporate theory states that investment decisions are best made with a hurdle rate that is adjusted for each investment's risks. Although determining a real estate risk premium has been employed by many investors, calculating differential risk premiums within real estate are rare and usually proprietary. Many real estate investors, in fact, may not be aware of the actual risk associated with different property types or markets. Some investors have attempted to apply the Capital Asset Pricing Model (CAPM) for a private real estate investment using real estate investment trust (REIT) returns to develop betas for private investments. This paper compares property and market betas for both private real estate (using the NCREIF Index) and public real estate (using the NAREIT Index) so that investors can have a more accurate risk premium beta or benchmark for their decisions.