Style Analysis in Real Estate Markets: Beyond the Sectors and Regions Dichotomy

Abstract

While style analysis has been studied extensively in equity markets, applications of this valuable tool for measuring and benchmarking performance and risk in a real estate context are still relatively new. Previous studies in the real estate market have identified three investment categories (rather than styles): sectors, administrative regions and economic regions. However, the low explanatory power reveals the need to extend this analysis to other investment styles. In fact real estate investors set their strategies considering factors that may differ from those found relevant for other asset classes. Following our analysis of obstacles to transferring equity style analysis to real estate, we identify four main real estate investment styles and apply a multivariate model to randomly generated portfolios to test the significance of each style in explaining portfolio returns. Results show that the alpha performance is significantly reduced when we account for the new investment styles, with small vs. big properties being the dominant one. Secondly, we find that the probability of obtaining alpha performance is dependent upon the actual exposure of funds to style factors. Finally, we obtain that both alpha and systematic risk levels are linked to the actual characteristics of portfolios. Our overall results suggest that fund managers should use these (and possibly other) style factors to set benchmarks and to analyze portfolio returns.