National Council Of Real Estate Investment Fiduciaries Research Articles

Private-equity commercial real estate, timberland, and farmland: market integration and information transition dynamics

Using data from the National Council of Real Estate Investment Fiduciaries (NCREIF), we examine market integration of commercial real estate and timberland–farmland assets via the Fama–MacBeth two-step approach under the intertemporal capital asset pricing framework. In addition, we study the information transition dynamics between those markets via the vector error correction model (VECM). We find evidence of market segregation and one-way information flow from the timberland–farmland market to the commercial real estate market. We conclude that commercial real estate and timberland–farmland assets are driven by different market fundamentals and that lagged timberland–farmland returns can help predict current commercial real estate returns. The only exception is during market downturns when commercial real estate and timberland–farmland markets are somewhat integrated and driven by some factors that are not specified in this study.

Inflation Illusion, Expertise and Commercial Real Estate

Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) provide a unique setting to examine the inflation illusion hypothesis. NCREIF provides appraisal-based and transaction-based return series allowing comparison of market participants with specific valuation expertise to general market participants. Results using the appraisal-based indices indicate that the mispricing term is not statistically significantly related to expected inflation, which suggests that commercial valuers do not suffer from inflation illusion. Interestingly, results based on the investor oriented transaction-based indices show that the mispricing term is inversely related to expected inflation and that mispricing plays an important role in determining the long-term discount rate. These results are robust across different empirical specifications, inflation data and subsamples by property type. The comprehensive findings suggest that the inflation illusion effect in direct investment in real estate differs from securitized markets. This study further adds to the general literature regarding the impact of inflation illusion on asset markets by showing that experienced participants may not suffer from inflation illusion which suggests that 1) novice participants may be driving its appearance and 2) experience and training mitigate this bias.

Transaction-Based Timberland Investment Returns

Using property-level data of 1987 quarter 1–2014 quarter 2 provided by the National Council of Real Estate Investment Fiduciaries (NCREIF), transaction-based timberland indices are constructed via the Heckman procedure. Results show that liquidity of private-equity timberland assets varies with business cycles; variance of transaction-based timberland indices is twice as large as that of the appraisal-based NCREIF Timberland Index; the role of private-equity timberland in a mixed portfolio is overstated by using the appraisal-based index; and the average of estimated ask and bid prices well captures the mean price of identified timberland sales, although timberland sellers reserve higher prices than buyers. <i>(JEL C34, Q23)</i>

Asset-Level Risk and Return in Real Estate Investments

Relatively little is known in the academic literature about the idiosyncratic returns of individual real estate investments, though quite a few commercial properties command prices commensurate with the market values of small publicly traded companies. I use purchase and sale data from the National Council of Real Estate Investment Fiduciaries (NCREIF) to compute holding period price appreciation returns for commercial properties. In stark contrast with liquid asset returns, idiosyncratic drift and volatility estimates diverge as the holding period shrinks. This puzzling phenomenon survives a variety of controls for vintage effects, systematic risk heterogeneity, and sample selection biases. I derive an equilibrium search-based illiquid asset pricing model which, when calibrated, fits the data very well. Thus a structural model of illiquidity seems crucial to a descriptive theory of real estate investment returns. These insights can potentially be extended to other illiquid asset classes such as private equity, mergers and acquisitions, large whole loans, and other real assets. The model can also be used to price derivatives such as debt claims.

The Dynamics of Appraisal Smoothing

We investigate the dynamics of appraisal smoothing in the National Council of Real Estate Investment Fiduciaries (NCREIF) index return using time‐varying asset pricing models. We find that smoothing is on average close to zero but varies substantially over time. From the inception of the NCREIF index in 1978 until the mid‐1990s, there was little evidence of smoothing. Smoothing has increased significantly since the mid‐1990s to the end of 2010. Smoothing increases when property prices or uncertainty increases. However, it decreases when sentiment in the property market is high or during recession periods. The substantial variation in the level of smoothing indicates that the volatility of unsmoothed appraisal‐based property returns would be significantly over‐ or under‐estimated for different periods if unsmoothed with a long‐run average smoothing.

Understanding Commercial Real Estate Indices

This paper examines five indices in the commercial real estate (CRE) markets: the National Association of Real Estate Investment Trusts (NAREIT) Index, the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI), the Transaction Based Index (TBI), Moody’s/Real Commercial Property Price Indices (CPPI), and CoStar Commercial Repeat-Sale Indices (CCRSI). We find much heterogeneity in the information content of these indices. NAREIT, NPI, and TBI may not be appropriate measures of current CRE market conditions in general, even though these indices, and especially the first two, are commonly used. We find substantial information differences between CPPI (an index driven by high-value CRE properties) and CCRSI (an index driven by low-value CRE properties) and the difference in information content is notable. This finding indicates that high- and low-value CRE markets are not closely linked. As most CRE indices are driven by high-value CRE markets, our findings suggest that most of these indices may not be very useful to non-institutional CRE investors, local banks who are the main lenders of such loans, or investors in CMBS where the underlying assets include low-value CREs. Finally, based on either CCRSI or CCPI, we conclude that CRE markets are local.

Real Estate Return Distributions Using Maximum Likelihood Estimation: New Technology, New Results

The estimation of parameters of real estate return distributions is affected by the tools used to do the work. Consistent with previous studies, investment risk models with infinite variance describe distributions of individual property returns in the National Council of Real Estate Investment Fiduciaries (NCREIF) database over the period 1980 to 2010. Applying Maximum Likelihood Estimation (MLE) to the historic data shows real estate investment risk to be heteroscedastic, but the characteristic exponent of the investment risk function varies more among property types than previously reported. Apartment properties introduced in this study evidence the same basic performance characteristics as office, retail, and industrial properties.

Is Value - Added and Opportunistic Real Estate Investing Beneficial? If So, Why?

There has been a great deal of interest in whether value-added and opportunistic real estate investing has resulted in appropriate risk-adjusted returns. In this paper, data from the National Council of Real Estate Investment Fiduciaries (NCREIF) property database are examined to bring new evidence to bear on the subject. Using these data, ex post returns are calculated for all sold properties. Then groups are formed based on these returns. A series of discriminant functions are then estimated to relate membership in these groups over time to value-added and opportunistic indicator variables (i.e., risk exposures) and market conditions. Results demonstrate that while value-added and opportunistic private equity real estate investments have higher returns than core investments, their superior returns are driven primarily by market conditions and the use of cheap debt rather than by risk exposure.

Transaction based indices for the UK commercial real estate market: an exploration using IPD transaction data

The nature of private commercial real estate markets presents difficulties for monitoring market performance. Assets are heterogeneous and spatially dispersed, trading is infrequent and there is no central marketplace in which prices and cash flows of properties can be easily observed. Appraisal based indices represent one response to these issues. However, these have been criticised on a number of grounds: that they may understate volatility, lag turning points and be affected by client influence issues. Thus, this paper reports econometrically derived transaction based indices of the UK commercial real estate market using Investment Property Databank (IPD) data, comparing them with published appraisal based indices. The method is similar to that presented by Fisher, Geltner, and Pollakowski (2007) and used by Massachusett, Institute of Technology (MIT) on National Council of Real Estate Investment Fiduciaries (NCREIF) data, although it employs value rather than equal weighting. The results show stronger growth from the transaction based indices in the run up to the peak in the UK market in 2007. They also show that returns from these series are more volatile and less autocorrelated than their appraisal based counterparts, but, surprisingly, differences in turning points were not found. The conclusion then debates the applications and limitations these series have as measures of market performance.

The Role of U.S. Timberland in Real Estate Portfolios

Executive Summary. Timberland is seen as a long-terminvestment that has recently received increased institutionalinvestor attention in many countries and potentiallyprovides added value in a mixed-asset portfolio.Using the National Council of Real Estate InvestmentFiduciaries (NCREIF) timberland series, this paperanalyses the risk-adjusted performance and portfoliodiversification benefits of timberland in the UnitedStates over the period of 1987–2007. Timberland in theU.S. is seen to have been a strongly performed asset classwith significant portfolio diversification benefits over thisperiod, with a significant portfolio role separate to thatof real estate. However, recent years have seen reducedrisk-adjusted returns, with some loss of portfolio diversificationbenefits of timberland with stocks and real estate.Global drivers are likely to see increased future demandfor timberland investment.

The Information Content of the NCREIF Index

This paper examines the dynamic behavior of the NationalCouncil of Real Estate Investment Fiduciaries (NCREIF) index.NCREIF total return and appreciation indexes are smoothand exhibit strong autocorrelation and autoregressiveheteroscedasticity. We test the information transmission from theNAREIT index to the NCREIF index. In our VAR analysis, theNAREIT index returns Granger cause the returns of the NCREIFindexes. In our ARCH information transmission analysis, theNCREIF indexes are observed to incorporate informationspillover from the NAREIT indexes in both the mean andvariance of the index returns. The ARCH dynamics between theNCREIF and NAREIT indexes suggest a nonlinear relationbetween the two indexes.

Smoothing, Nonsynchronous Appraisal and Cross-Sectional Aggregation in Real Estate Price Indices

In this article three econometric issues related to private-equity return indices, such as real estate indices, are explored (smoothing, nonsynchronous appraisal and cross-sectional aggregation). Under certain assumptions, it is found that index returns based on appraisals follow an ARFIMA(1, d, 1) (autoregressive fractionally integrated moving average) process, where the long memory parameter (d) explains the level of smoothing and the AR and MA parameters represent the level of persistence in marketwide fundamentals and the nonsynchronous appraisal, respectively. The empirical results show that: (1) the level of smoothing in appraisal-based real estate indices is far less than assumed in many academic studies (2) there is weak evidence of nonsynchronous appraisal in the UK, IPD (Investment Property Databank) index and (3) marketwide fundamentals are highly persistent for the IPD index returns. On the other hand, there is no evidence of nonsynchronous appraisal or a persistent common factor in the U.S. NCREIF (National Council of Real Estate Investment Fiduciaries) index.

Smoothing, Nonsynchronous Appraisal and Cross‐Sectional Aggregation in Real Estate Price Indices

In this article three econometric issues related to private‐equity return indices, such as real estate indices, are explored (smoothing, nonsynchronous appraisal and cross‐sectional aggregation). Under certain assumptions, it is found that index returns based on appraisals follow an ARFIMA(1, d, 1) (autoregressive fractionally integrated moving average) process, where the long memory parameter (d) explains the level of smoothing and the AR and MA parameters represent the level of persistence in marketwide fundamentals and the nonsynchronous appraisal, respectively. The empirical results show that: (1) the level of smoothing in appraisal‐based real estate indices is far less than assumed in many academic studies (2) there is weak evidence of nonsynchronous appraisal in the UK, IPD (Investment Property Databank) index and (3) marketwide fundamentals are highly persistent for the IPD index returns. On the other hand, there is no evidence of nonsynchronous appraisal or a persistent common factor in the U.S. NCREIF (National Council of Real Estate Investment Fiduciaries) index.

International Real Estate Review

In U.S. commercial real estate markets, a single index product produced by the National Council of Real Estate Investment Fiduciaries (NCREIF) has been used for both asset class research and for agent evaluation benchmarking. While the NCREIF Index is an invaluable tool for the U.S. real estate investment industry, in some respects its construction is not optimized for either research or the benchmarking function, though the gap between the reality and the ideal is arguably greatest on the research side. This paper first discusses the purpose of the ideal research index, the optimal depth and breadth of market coverage, and the type of information included in the research index database. This discussion is followed by an analysis of the ideal agent evaluation benchmark index, including the definition, purpose, and uses of evaluation benchmarking, the characteristics of the ideal benchmark index, market coverage and information onsiderations, and a comparison of benchmark indices in the private real estate market to comparable indices used to benchmark public securities.

The Role of U.S. Farml and in Real Estate Portfolios

Executive Summary. Farmland is seen as a longterm investment that receives investor attention in many countries and potentially provides added value in a mixed-asset portfolio. Using the National Council of Real Estate Investment Fiduciaries (NCREIF) farmland series, this paper analyses the risk-adjusted performance and port-folio diversification benefits of farmland in the United States over the 1984-2006 period. Recent years have seen significantly enhanced returns for U.S. farmland, with a slight reduction in risk; however, there has been some loss of portfolio diversification benefits for farmland with stocks and real estate.

Explaining Timberland Values in the United States

Abstract The financial fortunes of timberland investors ultimately depend on conditions in markets for timberland properties. The behavior of timberland markets, however, is not well understood. In this article, we use data from the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Property Index to develop historical series of timberland property values in the US South and US Pacific Northwest. We then use these historical series to examine the influence of operating revenues and interest rates on timberland values in each region. The former is influential, while the latter is not.

An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property

This study examines the correlation of the frequency of the sale of investment‐grade property with national, regional and local variables, including property‐ and owner‐specific characteristics. More specifically, the study identifies the primary factors that “explain” intertemporal changes in transaction frequency in the underlying properties used to develop the National Council of Real Estate Investment Fiduciaries (NCREIF) index. Understanding these factors yields important information that can be used by firms when forming market expectations and developing investment strategies.

International unsecuritized real estate

Given the paucity of good international unsecuritized real estate data and the growing interest in diversifying real estate only and mixed‐asset portfolios beyond national borders, this study introduces an unsecuritized Japanese total return index for office real estate dating back to 1970. Moreover, this study analyses risk and return characteristics and compares them with the risk and return characteristics of US domestic unsecuritized office real estate. The results indicate that first, National Council of Real Estate Investment Fiduciaries (NCREIF) and the Mitsubishi Trust and Banking Corporation and IKOMA Data Service System Co. Ltd (MTB‐IKOMA) geographic region returns are generally from a normal distribution, although neither is without exception; second, all ten sub‐indices suffer from autocorrelation at two or three lags even after lower‐order effects have been removed; third, returns in Japan are historically higher, although so too are the risks; and most importantly fourth, while returns within Japan and the USA, separately, are highly correlated, correlation between Japan and the USA is quite low. In sum, given the results of this study, it is likely that Japanese unsecuritized real estate could be used to diversify international real estate only, and mixed‐asset portfolios.

Modeling Office Returns at the Regional Level

Investors have two problems using the National Council of Real Estate Investment Fiduciaries (NCREIF) data to make decisions. The first is that every day they are making bets based on what will happen, not what has already happened. Although the future of real estate is influenced by its past, performance in the future will not be the same. The second problem is the obvious fact that different economies and real estate markets across the country perform differently during the course of the business cycle. A national index misses these differences.

Estimating Returns on Commercial Real Estate: A New Methodology Using Latent‐Variable Models

Despite their widespreao use as benchmarks of U.S. commercial real estate returns, indexes produced by the National Council of Real Estate Investment Fiduciaries (NCREIF) are subject to measurement problems that severely impair their ability to capture the true risk–return characteristics–especially volatility–of privately held commercial real estate. We utilize latent‐variable statistical methods to estimate an alternative index of privately held (unsecuritized) commercial real estate returns. Latent‐variable methods have been extensively applied in the behavioral sciences and, more recently, in finance and economics. Unlike factor analysis or other unconditional statistical approaches, latent variable models allow us to extract interpretable common information about unobserved private real estate returns using the information contained in various competing measures of returns that are measured with error. We find that our latent‐variable real estate return series is approximately twice as volatile as the aggregate NCREIF total return index, but less than half as volatile as the NAREIT equity index. Overall, our results strongly support the use of latent‐variable statistical models in the construction of return series for commercial real estate.