Direct Real Estate Research Articles

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

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.

Correlation Dynamics and Determinants in International Securitized Real Estate Markets

We find the correlation movements among eight developed securitized real estate markets and among their stock markets are quite synchronized over the period from 1995 through 2012. There is a high degree of correlation dependence with many of the realized correlation series subject to regime switching. Moreover, international correlations of public property returns could be significantly explained by five real estate variables that include global real estate securities market volatility, co‐existence of real estate investment trust (REIT) influence, underlying direct real estate return performance differential, real estate securities volatility differential and real estate securities market size differential after controlling for macroeconomic influence and stock market effect. The importance of the control and real estate variables in explaining the return correlations varies across the economies examined.

Valuing Direct Real Estate Investments by Using the ADAM Modelling Approach

Abstract In the Czech Republic the building is considered part of the land on which it lies. Consequently there can be owners of land and buildings being various natural or legal persons. Since 2014 there was a reform of the Czech Civil Code, which leads to the gradual consolidation of property ownership (land and buildings). In the usual case, the division of property on land and buildings in the Czech Republic and the subsequent consolidation efforts constitutes a need for assessment of the relevant investments. Income based model to assess the direct real estate investments (Asset Dividing Appraisal Model, ADAM) presented in this article is based on the methods of measurement values and calculating return on investment, and offers the possibility of investment by real estate appraisal in the background above the consolidation of ownership in the Czech Republic. In doing so, ADAM model combines the approaches to the valuation of property in continental Europe (German yield method) and international approaches, such as the capital market based discounted cash flow method. The objective of the model ADAM is to evaluate direct investments in real estate (land and buildings) and the resulting cash flows, rather than the determination of its current market value.

Intermediated investment management in private markets: Evidence from pension fund investments in real estate

We evaluate the economics of financial intermediation in alternative assets by investigating the allocation and performance of pension fund investments in real estate, the most significant alternative asset class for institutional investors. We document substantial heterogeneity in real estate investment cost and performance, determined by two main factors: mandate size and investment approach. Larger pension funds are more likely to invest in real estate internally, have lower costs, and higher net returns. Smaller pension funds invest primarily in direct real estate through external managers and fund-of-funds, and disregard listed property companies. Overall, we find that delegating real estate investment management to financial intermediaries increases costs and disproportionally reduces returns.

Private Equity Real Estate: Asymmetric Effects of Gearing and Drivers of Performance

This research investigates the key drivers of European non-listed real estate funds performance. In particular, it seeks to understand the extent to which funds’ underlying market and sector exposure, gearing, and fund size, contribute to a fund’s total return. Using a proprietary database covering the period 2001-2012, we construct a unique fund-specific performance benchmark based on average weighted return data in the markets and property types to which each fund is exposed. We track fund performance and its drivers through the years of rapid expansion of the non-listed real estate sector that was followed by the sharp contraction during the global financial crisis and establish whether performance drivers have a differential impact during market upturns and downturns. We find that fund performance during the study period was predominantly driven by the underlying direct real estate market and sector exposure of a fund along with the level of gearing and the size of a fund. The effect of gearing on returns is asymmetric, i.e. the negative effect of gearing is larger in a downturn than the positive effect during an upturn at each level of gearing, particularly for highly geared funds. Our empirical analysis also suggests that larger funds exhibit higher total returns while controlling for other factors and find a J-curve effect where funds in the first two years of their existence are marked by lower performance than fully operational or more mature funds.

Application of the Beta Coefficient in the Market of Direct residential Real Estate Investments

Abstract The beta coefficient is one of the most popular indices used in contemporary finances. Despite the fact that there are justified doubts connected with its application, it is currently difficult to imagine a situation in which the cost of capital would be calculated without the use of the CAPM model. Thus, an attempt at answering the question whether and to what degree beta may be used in the real estate market constitutes an interesting problem. This is because on the one hand, the formal structure suggests that beta should not be used for assets which are not included in the benchmark but, on the other hand, such a benchmark should, at least theoretically, contain all market assets. Therefore, a decision was made to have a closer look at this issue, with the analysis of the possibility of using the beta coefficient in the residential real estate market set as the objective. Using the database of prices in the direct real estate investment created by the NBP, a comparison was conducted with regard to features of undertaken investments on the basis of an analysis of systematic risk calculated using selected indices available on the Polish market.

International Direct Real Estate Risk Premiums in a Multi-Factor Estimation Model

We estimate international risk premiums for North and South Asia and US direct real estate by using a pooled-panel multi-factor least squares model. Data for the paper are from JLL REIS-Asia and the Russell-NCREIF Property Indexes. Our results, based on the Geltner and Miller (2007) 1st and 4th order autoregressive de-smoothing models, affirm the existence of appraisal smoothing in the direct real estate market returns. Secondly, our findings affirm that the true historical volatility of autoregressive lagged de-smoothed returns is a reasonable estimate of international direct real estate risk premiums. Thirdly, we find that changes in macroeconomic and real estate variables explain the office and retail returns more than the residential returns. There is also a high vacancy rate risk premium that we attribute to country-specific, institutional environmental factors. Furthermore, the South Asia direct real estate risk premium is found to be higher than that for North Asia. Moreover the risk premiums for North and South Asia are higher than that for the US. Finally, our results show that appraisal smoothed returns significantly underestimate the international direct real estate risk premiums for the sampled Asia markets and the US.

How Much Real Estate Is in Listed Real Estate?

Market-wide, stock market specific and real estate market specific risk – what kind of risk and to which extent drives the returns of listed real estate? In contrast to the existing literature and based on a structural asset pricing model calibrated to the empirical data in the US, we show that at least two thirds of the risk premium of listed real estate are driven by the same factors as direct real estate. Our results shed much-needed light on the risk-characteristics of listed real estate returns and are of high interest for academics, regulators, and portfolio managers alike.

Integration between real estate equity and non-real estate equity

Purpose– The paper examined the long-run relationship between real estate equity (property listed stock) and non-real estate equity (common stock) in the Nigerian capital market and established the integration between the investments. The paper aims to discuss these issues.Design/methodology/approach– The data collected comprised quarterly returns on property listed stock and All Share Index for the period of January 1999-December 2011. The calculated quarterly returns of the investments were subjected to the Philip-Person unit root test after which the integration between the investments was analysed using the Johansson integration test.Findings– The results showed that real estate equity performed better the non-real estate equity but with corresponding higher risk level. Also, real estate equity had a slightly lower performance when compared with non-real estate equity on return/risk ratio basis. The findings showed that property listed stock (real estate equity) was integrated with common stock or non-real estate equity and suggest that the Nigerian listed property stock, by nature, was similar to REITs. This result negates the belief that property listed stock's returns are integrated with direct real estate market and are often influenced by the returns of the underlying direct real estate assets.Practical implications– The paper implied that while investors could consider investing in real estate equity and earn better return than investing in common equity in the Nigerian capital market, the inclusion of both in a domestic portfolio could be expected to bring little or no diversification benefit.Originality/value– The paper is one of the few attempts at assessing the long-run relationship between property listed stock as a form of real estate equity and non-real estate equity and especially from African emerging market perspective.

The integration of direct real estate and stock markets in Asia

Currently, there exists relatively little research investigating the long-term association between stock and direct real estate markets. Using appropriate transaction-based property indices, this study focuses on the relationship between stock and direct real estate markets in nine Asian countries from the period 1980 to 2012 through both linear and nonlinear cointegration techniques. We find empirical evidence of linear cointegration of stock and property markets in Taiwan, fractional cointegration in Singapore and Hong Kong and no evidence of cointegration in China, Japan, Thailand, Malaysia, Indonesia and South Korea. It is concluded that segmentation of property markets from stock markets does not appear to be linked to the differences in the maturity of national financial markets and that the differing degrees of integration across Asia may instead be reflective of a range of factors impacting upon the underlying economic structures in each country.

Response Speeds of Direct and Securitized Real Estate to Shocks in the Fundamentals

We use sector level REIT and transaction-based direct real estate data for the U.S. to provide a clearer understanding of the dynamic relations between public and private real estate returns. We exclude leverage from REIT returns to make the REIT data more comparable with the direct market data. We also include economic fundamentals in the analysis to take account of the influence of fundamentals on real estate market dynamics. Moreover, we consider the influence of the ‘escrow lag’ in the recording of private market prices. Even when catering for those factors, the generalized impulse responses from estimated vector error-correction models provide evidence of REIT returns leading private returns in the office, retail, and apartment sectors, but not in the industrial sector. These lead-lag relations are due to the slow reaction of private market returns to shocks in REIT returns and also in the risk premium and economic sentiment. The lead-lag relations remain even when the constant-liquidity direct market index is used instead of the conventional index.

Cross-Border Capital Flows into Real Estate

This study investigates the determinants of cross-border capital flows into direct real estate markets. In particular, it investigates how existing institutional, regulatory and real estate specific barriers affect cross-border real estate inflows and outflows in a sample of 24 developed and emerging countries, and whether investors seek out targets with lower barriers and regulatory arbitrage. We do not find evidence of significant cross-border institutional or regulatory arbitrage in the real estate market. However, real estate market liquidity is found to be the most important driver of cross-border flows. While many of the institutional barriers included in this analysis do not appear to impact the level of real estate inflows significantly, their presence tends to suppress real estate capital outflows to other countries. Overall, easy access to financial markets, a good economic environment and transparent real estate markets may enhance real estate outflows, while returns and the macroeconomy are found to enhance domestic real estate investment.

Are Public and Private Asset Returns and Risks the Same? Evidence from Real Estate Data

This article aims to investigate the similarity of public and private real estate returns and risks over the relatively long horizon using data for the U.S and the U.K. The results show evidence of a one-to-one relationship between publicly traded REIT performance and privately traded direct real estate investment performance in three out of four U.S. real estate sectors and one out of two U.K. sectors included in the analysis. The return volatilities generally do not differ significantly between the REIT and direct real estate markets regardless of sector and investment horizon. The findings have important practical implications. First, they indicate that public and private real estate investments can be considered to work as good substitutes in an investment portfolio with several years investment horizon. Second, they suggest that REIT related ETFs and derivatives could be used to hedge risks caused by investors’ direct real estate holdings or by lending institutions’ mortgage lending inventory.

A Global Perspective on Pension Fund Investmentsin Real Estate

Real estate is the third-largest asset class for institutional investors, but research into the performance of pension fund investments in real estate is scant. This article employs a unique set of data, the CEM database, to study the real estate investment approach, cost, and performance for a global panel of almost a thousand pension funds. The results show that smaller pension funds invest primarily in direct real estate, through external managers and fund-offunds, and are likely to disregard listed property companies in their real estate allocation. Larger pension funds are more likely to invest in real estate internally, exhibit lower costs, and achieve higher net returns. Internal real estate investment management is associated with lower costs and disproportionally higher returns. Finally, we document that U.S. pension plans’ real estate investments significantly underperform both their benchmarks and their foreign peers. <b>TOPICS:</b>Real estate, pension funds, equity portfolio management

Searching for a Common Factor in Public and Private Real Estate Returns

We introduce a methodology to estimate common real estate returns and cycles across public and private real estate markets. We first place REIT indices and direct real estate—NCREIF appraisal-based and transaction-based indices (NPI and NTBI)—on a comparable basis by adjusting for leverage and sector. We extract a common real estate factor, which is allowed to be persistent, from all these markets. Individual real estate indices load on this common factor and they also are driven by persistent, idiosyncratic shocks. The common real estate factor is procyclical and has low correlations with standard systematic factors from public markets. Short-run idiosyncratic deviations from the common real estate factor load on several capital market factors for REITs and on liquidity factors for direct real estate.

Assessing the Impact of Real Estate on Target Date Fund Performance

Defined benefit (DB) plans have used direct real estate in their asset allocations for forty years. Defined contribution (DC) plan sponsors are using the shift to asset allocation funds as an opportunity to do the same. We found that if direct properties were added to target date funds over the past four decades, DC participants in these funds would have experienced substantially improved risk-adjusted performance. <b>TOPICS:</b>Real estate, retirement, in portfolio management

“Green” buildings and Real Estate Investment Trust's (REIT) performance

PurposeThe paper has the following objectives in mind: to examine whether or not “green” developments have any significant effect on the Real Estate Investment Trust's (REIT) operational and financial performance; to examine whether or not the effects of “green” developments on the REIT's performance is consistent across the different property types namely office, retail and residential.Design/methodology/approachThe paper introduces two variables to measure “greenness” of REIT's. These variables include the percentage of square feet of certified properties and the average “greenness” score. Firm's size as measured by taking natural logarithm of total assets was also included as it serves as an indirect measurement of “greenness”. Other financial variables were added to control for the differences in firm's characteristics. This is meant to isolate the variation in performance variable that could be explained by the “green” variables. Following which, regressions (OLS) were estimated for each of the performance variables as measured by ROA, FFO/total revenue and ROE.FindingsThe general findings of this paper are: “Green” buildings do impact both the operational and financial performance of REITs. However, different measures of “greenness” of REIT's property portfolio will yield different set of results; the observed impacts of “green” buildings are mainly significant for both the K‐REIT and Capitamall Trust (CMT) whereas that for City Developments Limited (CDL) are insignificant; the observed effects vary across the different property types namely office, retail and residential as represented by K‐REIT, CMT and CDL. The paper provides evidence to show that “green” buildings are better options given the various benefits, as compared to their counterparts.Practical implicationsThe findings of this paper should serve as a meaningful guide to look at how investments in “green” and sustainable buildings will create value for real estate investors at the REIT's level.Originality/valueThe paper offers insightful information for REIT's managers when they make decisions on the acquisition of “green” properties or retrofitting of the existing properties in their direct real estate portfolios. As such, this paper is meant to extend the body of literature on “green” buildings by investigating the significance of “green” buildings on REIT's performance.

Towards a listed real estate investment valuation model

This paper presents a Listed Real Estate Investment Valuation Model that was developed to investigate the movement in indirect real estate investment through the consideration of the underlying assets of property loan stock companies. Specific reference is given to information that is made available to shareholders by way of annual financial statements in order to determine the extent to which shareholders can make investment decisions based on this information. The study enhances the knowledge of direct vs. indirect real estate investment behaviour and provides more insight into price discovery in the property sector.

Equities or real estate? An international evaluation of listed property markets

PurposeThe purpose of the paper is to examine the role of securitised real estate within the confines of a multi‐asset investment portfolio and to identify if indeed securitised real estate can afford investors the desired investment benefits of direct property investment whilst mitigating many of the recognised barriers and risks.Design/methodology/approachThe paper employs a suite of analytical techniques; lead‐lag correlations are utilised to examine market dynamics between listed and direct real estate markets across jurisdictions. Grainger causality and co‐integration techniques are applied to examine the nature and extent of relationships between investment markets with optimal portfolio analysis utilised to explore the role of securitised real estate and the optimum weighting allocation within the confines of a multi‐asset investment portfolio.FindingsThe findings demonstrated the unresponsive nature of direct real estate markets relative to listed real estate markets – in some jurisdictions the extent of lag can be as much as 12 months. Whilst the research did not identify a Grainger causality relationship between listed and direct property markets across the jurisdictions, co‐integration analysis does infer trend reverting price behaviour in the long run (ten years) between direct and listed real estate markets. Optimal portfolio analysis serves to demonstrate the crucial role of real estate within a multi‐asset portfolio in terms of both mitigating risk and enhancing performance over the ten‐year time series. Indeed, the optimal portfolio analysis highlights the compatibility and complementarity of listed and direct real estate within a multi‐asset investment portfolio.Originality/valueThe question if securitised real estate is a viable proxy for direct property investment is as inconclusive as it is enduring. In contrast to the large embodiment of previous work, this paper adopts an international market perspective depicting the global nature of securitised real estate investment markets whilst also reflecting on the extent of co‐integration between asset classes and across jurisdictions during a period of extreme financial and economic distress.

On Indexing Commercial Real Estate Properties and Portfolios

Commercial real estate indices play an important role in performance evaluation and overall investment strategy. However, the issue of how representative they are of the returns on portfolios of commercial properties is an open issue. Our study addresses this topic by analyzing a sample of 12,427 repeat sales transactions between Q4 2000 and Q2 2011. We find that the aggregate real estate indices (Moody’s REAL CPPI) do a good job of tracking real returns when portfolios of more than 20 properties are considered. At this level, tracking is somewhat less effective than our benchmark of the S&P500 and its component stocks. Compared to the average root mean squared deviation (RMSD) from one asset, randomly selected portfolios with 20 assets reduce the RMSD by 75 % for the S&P500 compared to 66 % for the aggregate index. These results suggest that the aggregate indices can be effective in hedging and evaluating the performance of direct real estate investment. We further find that tracking at the property type level provides little benefit over using an aggregate index. However, indexing using a property type and location matched index provides lower tracking error for any level of diversification.