REIT Index Research Articles

Outperforming the benchmark: online information demand and REIT market performance

Purpose– The purpose of this paper is to investigate whether there is a relationship between asset-specific online search interest and movements in the US REIT market.Design/methodology/approach– The authors collect search volume (SV) data from “Google Trends” for a set of keywords representing the information demand of real estate (equity) investors. On this basis, the authors test hypothetical investment strategies based on changes in internet SV, to anticipate REIT market movements.Findings– The results reveal that people’s information demand can indeed serve as a successful predictor for the US REIT market. Among other findings, evidence is provided that there is a significant relationship between asset-specific keywords and the US REIT market. Specifically, investment strategies based on weekly changes in Google SV would have outperformed a buy-and-hold strategy (0.1 percent p.a.) for the Morgan Stanley Capital International US REIT Index by a remarkable 15.4 percent p.a. between 2006 and 2013. Furthermore, the authors find that real-estate-related terms are more suitable than rather general, finance-related terms for predicting REIT market movements.Practical implications– The findings should be of particular interest for REIT market investors, as the established relationships can potentially be utilized to anticipate short-term REIT market movements.Originality/value– This is the first paper which applies Google search query data to the REIT market.

Systematic Risk Asymmetry of the American Real Estate Securities: Some New Econometric Evidences

In this paper we observe an increase of the systematic risk of the American real estate securities in the year 2007 which go back to the initial values in the year 2009. At the same time we observe the possible presence of structural breaks. In order to evaluate the systematic risk we chose the Fama and French three factor model and studied the relationship between the extra-return of the REIT index, used as a proxy of American real estate securities and the extra return of the S&P 500 index represented by the market portfolio return. The results confirm the presence of an “Asymmetric Beta Puzzle” in agreement with previous studies. At the same time the results show that whereas in the past the REIT securities were considered to be conservative securities, in the year of the subprime crisis, they behaved as speculative one. REIT securities in particular have amplified and almost doubled the variations of the market risk premium.

A Quantitative Comparison of the Financial Returns of Index ETFs and Matched Index Mutual Funds

Investments in exchange traded funds (ETFs) have gained significant popularity among the financial investors.ETFs track industry-based indexes. Index mutual funds also track industry-based indexes. The financial investorsdo not have a documented analytical method to compare the financial returns of index ETFs and matched indexfunds. We have performed quantitative comparisons of the financial returns of index ETFs and matched indexmutual funds with the use of nonparametric Kruskal-Wallis hypotheses tests, assuming that the financial returnsof index ETFs and matched index mutual funds are independent. We have tested the null hypotheses that themedians of the distributions of the Sharpe ratios and the risk-adjusted buy and hold returns of the S&P 500 index,large cap index, mid cap index, small cap growth index, REIT index, and total bond market index ETFs are asthe same as the medians of the distributions of the Sharpe ratios and the risk-adjusted buy and hold returns of thematched S&P 500 index, large cap index, mid cap index, small cap growth index, REIT index, and total bondmarket index mutual funds. The time periods of comparison have been from the inception dates of ETFs till theend of 2013. The findings from this research work suggest that we do not reject the null hypotheses that thedistributions of the Sharpe ratios and the risk-adjusted buy and hold returns of index ETFs and the distributionsof the Sharpe ratios and the risk-adjusted buy and hold returns of matched index mutual funds have the samemedians during the time periods that we have tested.

CO-MOVEMENTS OF REIT INDICES WITH STRUCTURAL CHANGES BEFORE AND DURING THE SUBPRIME MORTGAGE CRISIS: EVIDENCE FROM EURO-MED MARKETS

This paper examines the long-run relationships between the REIT indices of the UK, Turkey and Israel in the Euro-Med zone with that of MSCI US REIT Index by using weekly data over the period 2003Q3 through 2009Q3, which includes the latest US subprime mortgage crisis and its effects on global stock markets. Although our EG test results do not indicate a long-run relationship, after taking account of the structural changes by applying the GH test, we find a long-run interaction between the REIT indices of UK and Israel with that of the US. However, our results indicate the lack of co-movement between REIT index of Turkey with the US. In addition, our dynamic OLS test results indicate a perfect relationship between the UK and the US indices. Our findings show that international investors who make long-term investments can only gain from diversifying into the real estate market of Turkey among the involved markets in the Euro-Med zone.

Does index addition add any new information? Evidence from REIT dividend forecasts

The information-free event hypothesis associated with index additions has been very well documented in the finance literature. Most studies confirm that index addition conveys positive information about the future prospect of firms recently added to an index. However, this may not be the case for REITs, which are considered to have higher informational efficiency due to the transparent nature of their balance sheet. Using a sample of 108 additions to the S&P REIT Index over a period of 2000–2011, we test this hypothesis using analyst dividend forecasts. Our results are different from those found by similar studies in finance for non-REIT stocks. In most of the cases and consistent with our a priori expectations, the findings suggest that index addition announcement may not reveal much information beyond what is available from a REIT’s balance sheet. Specifically, our results suggest different responses of the analysts to the index announcement depending upon the type of revision to the dividend forecast. For positive revised estimates, the announcement does not seem to add any new information to the analysts. However, for the two other scenarios, i.e. negative revised estimates and no revision to the estimates, the results show some evidence of information bias. Thus, we see an asymmetric response depending on the type of revision made by the analyst. However, when we look at the longer time horizon between the forecasts, we find no influence of the index addition news for any of the cases analysed. Further, our results are robust to using EPS as a measure of analyst forecast as well.

The Market Timing Power of Moving Averages: Evidence from US REITs and REIT Indexes

AbstractI present evidence that a moving average (MA) trading strategy dominates buying and holding the underlying asset in a mean‐variance sense using monthly returns of value‐weighted and equal‐weighted US REIT indexes over the period January 1980 until December 2010. The abnormal returns are largely insensitive to the four Carhart factors and produce economically and statistically significant alphas of between 10 and 15% per year after transaction costs. This performance is robust to different lags of the MA and in subperiods while investor sentiment, liquidity risks, business cycles, up and down markets, and the default spread cannot fully account for its performance. The MA strategy works just as well with randomly generated returns and bootstrapped returns. The substantial market timing ability of the MA strategy appears to be the main driver of the abnormal returns. The returns to the MA strategy resemble the returns of an imperfect at‐the‐money protective put strategy relative to the underlying portfolio. The lagged signal to switch has substantial predictive power over the subsequent return of the REIT index. The MA strategy avoids the sharp downturn at the beginning of 2008 and substantially outperforms the cumulative returns of the buy‐and‐hold strategy using all of the 20 REIT indexes. The results from applying the MA strategy with 274 individual REITs largely corroborate the findings for the REIT indexes.

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.

Price and volatility dynamics between securitized real estate spot and futures markets

This study is among the first to examine the price, volatility and covariance dynamics between securitized real estate spot and futures markets. It provides a distinctive and yet complementary perspective on the predictability of real estate spot return and spot volatility based on the information from the spot market alone. The results show that for the EPRA/NAREIT Europe index, the spot market tends to lead its futures market in the long run during the sample period, which can be attributed to a rather illiquid real estate futures market in sharp contrast with a voluminous spot market. Furthermore, we find the V-shaped asymmetric effect of the basis on the futures market volatility, which represents the primary channel of strong volatility transmission between securitized real estate spot and futures markets during the whole sample and the post-crisis period. This sheds light on the hedging effectiveness for the REIT index.

Speculative Bubbles, Financial Crises and Convergence in Global Real Estate Investment Trusts

We test for price bubbles in fourteen national REIT markets and examine the extent of convergence toward a common trend between the REITs of these countries. Our methodology consists of the recently developed test of Phillips, Shi and Yu (2012) for mildly explosive processes, and the Phillips and Sul (2007) method for modelling convergence between random variables. We find evidence of explosive behaviour in index levels of eleven of the fourteen markets. In contrast explosive dynamics are found in only four of the fourteen price/dividend ratios, suggesting that the explosive behaviours found may be due to the explosive nature of the dividends. All of the episodes of explosive behaviour, with the exception of Japan, are date-stamped to periods prior to the 2007-2009 financial crisis. Testing for convergence between the REIT indices and price/dividend ratios we find a number of periods over which the markets converge towards a common trend. Interestingly, all of the convergence intervals coincide with either periods of crises, or periods of market exuberance (bubbles). For instance, the crises periods correspond with the 2000 dot-com crash, the 2007-2009 crisis period and the 2010-2013 European sovereign debt crisis suggesting that increases in REIT comovements occur during intervals of financial turbulence, and lending support for the contagion hypothesis. The bubble periods of 2004-2005 are also associated with convergence towards a common trend in the EU markets.

On the Tracking Performance and Return Deviationof Real Estate Leveraged ETFs

This article studies the performance and return deviation of real estate leveraged exchange-traded funds (RE LETFs) tracking the Dow Jones U.S. Real Estate Index (DJUSRE) and the Morgan Stanley U.S. REIT Index (RMZ) from their inception to March 2011. Relative to the broad-market LETFs tracking the S&amp;P 500 Index, the RE LETF market is marked with greater daily market inefficiency, less-predictable management tracking error, and much more pronounced negative compounding deviation. To avoid sample-specific bias, we also simulate the target performance of RE LETFs using the entire history of the DJUSRE from 1992 and show much less severe negative compounding deviation along with a consistent set of determinants. While the introduction of RE LETFs has provided investors with innovative financial instruments to leverage their long or short exposure to the traditional illiquid real estate sector, this article suggests that the behaviors, sources, and determinants of the return deviation on RE LETFs should be taken into consideration when formulating effective asset allocation strategies. <b>TOPICS:</b>Real estate, exchange-traded funds and applications, performance measurement

Are Offices Really More Risky than Retail? A Note on Relative Real Estate Sector Risk

There is a notion – both among theoreticians and practitioners – that office properties are riskier than retail properties. There are passing references to this issue in existing literature, with no clear-cut conclusions. We set out to examine the investment risk of these 2 CRE sectors, using indices of real property and of REIT indices from the US market. We find that while in the past the notion that offices are riskier was correct, this is no longer true. We show that there has been a process of convergence, and currently the investment risk of retail is slightly higher.

The Dynamics of Returns and Volatility in the Emerging and Developed Asian Reit Markets

This paper examines the dynamics of return and volatility spillovers across the REIT markets of Japan, Singapore, Hong Kong, Malaysia, Taiwan, Thailand, and South Korea from June 2006 to May 2011. The emerging markets offer lower returns than the developed markets but lower risk as well. The emerging REIT index outperformed the developed REIT index on a risk-adjusted basis. The analysis suggests that correlations among Asian REIT markets are relatively low, ranging from 0.14 to 0.42 over the full-sample period. The results further indicate that correlations among emerging REIT markets are lower than that among developed markets. However, correlations are non-constant over time and increased during the recent Global Financial Crisis. The results from the EGARCH models show that there is a strong tendency for REIT returns to transmit from developed markets (e.g., Japan and Singapore) to emerging REIT markets. In regard to volatility transmission, the mechanism appears to be multidirectional.

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 pro-cyclical 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.

Identifying Interdependency Among Monetary Policy, Exchange Rates, Reits and Stock Markets During the Period of Global Financial Crisis in OECD Countries

This study examines the Time Varying Dynamic Conditional Correlations (TVDCC)among the returns of short term Money Market Rates, Real Effective Exchange Rates, and of other asset classes including, Stock Market (SM) indices and REIT indices during the Dot-com Bubble (2000) and Recent Global Financial Crisis (2008-2009). We employ DCC GARCH model using monthly data from January, 1999 to May, 2011 for 14 OECD markets. The results show that correlation between US FFR (Federal Funds Rate) and the MMR for the rest of the OECD countries is positive, the highest correlation is found between US FFR and Switzerland MMR where as lowest correlation exists between US FFR and Japan MMR. By the end of 2001 correlations increased significantly except for Norway. During Global Financial crisis(20008-2009) correlation get distorted by first decline and then rise in correlation . The the average TVDCC between US FFFR and REIT indices are positive for all the countries, and same is the case for US FFR and SM. TVDCC between MMR and REIT indices are also found to be positive for all the countries under study except for Canada, Japan, Sweden and Norway. The average TVDCC between MMR and SM are positive for all the countries except Canada, Japan, UK and Sweden. Finally we find that SMs in each OECD country are more correlated (in absolute terms) to US FFR than the MMR in their own country. We also find similar results for REER and REITs except New Zealand.

The Performance of Thai-Reits in A Mixed-Asset Portfolio

This study examines the development of REITs in Thailand over October 2003 – September 2010, analyses their risk and return characteristics, investigates the dynamic correlations between REITs and other investment vehicles and determines the diversification potential of Thai-REITs in a mixed-asset portfolio. Sub-period analysis is also conducted to analyse the impact of the GFC to the performance of Thai-REITs and correlations with other asset classes. As there was no REIT index available for the Thai listed REITs, a value-weighted REITs index was constructed to represent listed REITs on the Stock Exchange of Thailand. The results show that pre-GFC and during the GFC, Thai-REITs only played a minor role in the mixed-asset portfolio at low risk levels due to their poor risk-adjusted performance. However, the period post-GFC saw Thai-REITs gaining a significant position in the mixed-asset portfolio as the inclusion of Thai-REITs reduced risk and enhanced the return of the portfolio. In addition, the study also suggests that Thai-REITs offer a low-risk investment option and a better portfolio optimizer than property companies for shares investors.

Stress Test For The Financial Optimization Models During The 2009 Recession

&lt;p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"&gt;&lt;span style="font-size: 10pt;"&gt;&lt;span style="font-family: Times New Roman;"&gt;The Sub-prime Mortgage credit crisis has led to a major downturn in virtually all financial sectors and consequently &lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp;&lt;/span&gt;the real estate sector received the brunt of&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;the 2008 &amp;ndash; 2009 financial crisis. However, this downturn undoubtedly has provided &lt;span style="mso-bidi-font-weight: bold;"&gt;an&lt;/span&gt; opportunity to test what investment strategy could have deflected the shocking force of this crisis and specifically what method could&lt;span style="mso-bidi-font-weight: bold;"&gt; have minimized&lt;/span&gt; &lt;span style="mso-bidi-font-weight: bold;"&gt;the risk of the most negatively affected investment -- Equity Real Estate Trust funds&lt;/span&gt;.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp;&amp;nbsp; &lt;/span&gt;Using ex-post data of EREITs, this research examines the implications and benefits of employing optimal portfolio allocation methods to different size EREIT portfolios during current financial crisis. This study compares the returns of optimally weighted EREIT portfolios to equally weighted EREIT portfolios, against the Dow Jones Equity REIT Index (DJEREIT Index).&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;The results indicate that a properly rebalanced risk-adjusted model portfolio (RAMP) outperforms both an equally weighted portfolio of identical assets and the DJEREIT Index.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;In fact, the twelve-asset optimized portfolio yields a superior return of 12.7% when compared to a return of an equally weighted portfolio of identical EREITs, and the DJEREIT Index during the three-year time period examined. &lt;/span&gt;&lt;/span&gt;&lt;/p&gt;

Changes in REIT Stock Prices, Trading Volume and Institutional Ownership Resulting from S&P REIT Index Changes

Executive Summary. This study investigates the announcement effects of additions and deletions of individual stocks in the S&P REIT Index. The findings indicate a small but significant stock price reaction to additions. However, an addition or deletion has no impact on trading volume and institutional ownership. Overall, there is but limited opportunity for institutional investors to earn abnormal returns around changes in the REIT Index because of trading costs and other incidental expenses. However, individual investors may be able to exploit the arbitrage opportunity if their trading costs are lower. Finally, significant long-term valuation gains following deletions are found—apparently, deletions serve to discipline managers to improve performance.

An Analysis of Relative Return Behavior: REITs vs Stocks

We have analyzed the return behavior of the equity REIT, mortgage REIT, and SP500 indices using monthly data for the period of 1972-2001. Following a large monthly gain, investors can benefit by adopting a momentum buying strategy for stocks or mortgage for REITs, but not for equity REITs. Investors can also profitably employ a mean reversion strategy for any of the three indices. They would wait for a large decline and then buy the index and hold it for six months. Significant calendar effects were found for both REIT and stock indices involving positive January, and negative August and October effects, although there are some differences in seasonal effects between REITs and stocks. The correlation coefficients between all three asset classes are similar, but the relationship between stocks and equity REITs has lessened over time. We also show that equity REITs dominate mortgage REITs on a risk-return basis and that REITs compare favorably with stocks. Our findings suggest that equity REITs can enhance the risk-return relationship of an investment portfolio and should be considered as a major asset class just like stocks or bonds.

REITs and Inflation: A Long-Run Perspective

We examine whether REITs provide an inflation hedge in the long run. We also investigate whether the apparent lack of a positive relationship between general prices and REIT returns in prior studies arises from the impact that stock market movements have on REITs. As in most prior research, regression analysis provides no evidence that REIT returns are positively related to temporary or permanent components of inflation measures. We rule out the possibility that a stock market-induced proxy effect is the cause for the apparent lack of relationship between REITs and inflation. On the other hand, we find some evidence that REITs provide a long-run inflation hedge. Johansen (1988) tests for cointegration isolate cointegrating vectors between alternate REIT indices and the CPI over the 1972-95 interval. However, the more standard residual-based cointegration techniques failed to provide similar evidence.

The Hedged REIT Index and Mixed-Asset Portfolios

Executive Summary. As international investing becomes more and more popular, studies of mixed-asset portfolios can no longer ignore foreign securities. This study investigates the role of U.S. commercial real estate in mixed-asset portfolios consisting of U.S. common stocks, U.S. bonds and international common equity. Historically, real estate performance has been measured by appraisal-based indices, such as the Russell-NCREIF index. It is well known that these indices suffer from appraisal-smoothing and seasonality problems. Therefore, using the Russell-NCREIF index, for example, in asset allocation decisions might be incorrect because the estimated correlations of real estate with other assets and the estimated volatility of real estate tend to be biased. A hedged equity REIT index, which reflects the returns of equity REITs after the effects of the general stock market are removed from REIT returns, is used in this study to proxy the performance of commercial real estate. The results indicate that inve...