Real Estate Investments,Product Market Competition and Stock Returns

By limiting operating flexibility, real estate investments are found to increase firm risk, thus expected returns. This study introduces product market competition as a critical determinant of the relation between real estate investments and stock returns. As part of capacity strategies, these investments are generally associated with increased market power and lower cash flow volatility in oligopolistic industries. I present a simple model of oligopolistic competition showing a negative relation between real estate holdings and firm beta, and empirically confirm this prediction. Controlling for product market competition enhances identification of the endogenous relation between real estate investments and stock returns.     

Macroeconomic Risk Factors and the Role of Mispriced Credit in the Returns from International Real Estate Securities

We examine the canonical influence of global market, currency and inflation risks on the returns from international real estate securities. In addition, we study how mispricing of credit in the local banking systems is related to the returns from these securities. We analyze a global sample of real estate securities over the period 1999 to 2011 to test our hypotheses. We find support for the anticipated relationships between macroeconomic risk factors and the returns from international real estate securities. Our evidence also supports the expected link between local credit market conditions and the performance of international real estate securities.     

What Does the Stock Market Tell Us About Real Estate Returns?

This paper analyzes the risks and returns of different types of real estate-related firms traded on the New York and American stock exchanges (NYSE and AMEX). We examine the relation between real estate stock portfolio returns and returns on a standard appraisal-based index, and find that lagged values of traded real estate portfolio returns can predict returns on the appraisal-based index after controlling for persistence in the appraisal series. The stock market reflects information about real estate markets that is later imbedded in infrequent property appraisals. Additional analysis suggests that the differences in the return and risk characteristics across different types of traded real estate firms can be explained in part by appealing to real estate market fundamentals relating to the degree of dependence of the real estate firm upon rental cash flows from existing buildings. These findings highlight the heterogeneity of securitized real estate-related firms.     

Price Signaling and Return Chasing: International Evidence from Maturing REIT Markets

This article examines the liquidity of international real estate securities across 10 markets over the period 1990–2015. We apply and compare results for four different measures of liquidity, and find that while liquidity has increased consistently, wide variations still exist across markets, with the United States and Japan in the lead. Our results also suggest that the introduction of local REIT regimes did not have any pervasive effects on stock liquidity. When we study the relationship between liquidity and returns, we document new and consistent evidence for international return chasing behavior, whose pattern is a function of local market efficiency, listed real estate market maturity and stock ownership dispersion. The introduction of REIT regimes seems to weaken the importance of extra performance over and above general equity returns as investors tend to allocate funds to real estate securities within real estate rather than equity portfolios.     

Markov Switching Dynamics in REIT Returns: Univariate and Multivariate Evidence on Forecasting Performance

We document the presence of Markov switching regimes in expected returns, variances and the implied reward‐to‐risk ratio of real estate investment trust (REIT) returns and compare them to properties of stocks and bonds. Our evidence suggests that regime switching techniques are more successful over the period 1972–2008 than other time‐series models are. When the analysis is extended to a multivariate setting in which REIT, stock and bond returns are modeled jointly, we find that the data call for the specification of four separate regimes. These result from the absence of synchronicity among the regimes that characterize univariate REIT, stock and bond returns.     

Risk and Return on Real Estate: Evidence from Equity REITs

We analyze monthly returns on an equally weighted index of eighteen to twenty-three equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973–87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs.
Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60% of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.     

Market Efficiency and Return Statistics: Evidence from Real Estate and Stock Markets Using a Present-Value Approach

This paper develops a methodology to identify asset price response to news in the framework of the Campbell–Shiller log-linear present-value equation. We further show that a slow price adjustment in real estate markets not only induces a high serial autocorrelation in excess returns, but also dampens the return volatility and the correlation with excess returns in other asset markets. Using Hong Kong real estate and stock market data, we find that the quarterly real estate price assimilates only about half the effect of market news, whereas the quarterly stock price incorporates the news fully. Our analysis identifies a cumulative price adjustment that recovers lost information in real estate returns due to market inefficiency and thereby restores the real estate return volatility and the correlation between real estate and stock markets.     

Global Financial Integration and Real Estate Security Returns

Have globalization and increasing economic and financial integration affected the rates of return of publicly traded real estate companies around the world? Using a set of multifactor models for annual data for 946 firms from 16 countries over the sample period, 1995–2002, we estimate the impact of a country's economic openness on returns of publicly traded real estate firms, controlling for the effects of global capital markets, domestic macroeconomic conditions and firm‐specific variables. We find that a country's real estate security excess (risk‐adjusted) returns are negatively related to its openness. The results are robust across different multifactor model specifications and are a testament to increasing global financial integration and its interplay with the real estate sector.     

The Consequences of REIT Index Membership for Return Patterns

The impact of stock market index membership on Real Estate Investment Trust (REIT) stock returns is unclear. Returns may become more like those of other indexed stocks and less like those of their underlying properties. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns. However, index membership also enhances the link between REIT returns and the underlying real estate, consistent with improved pricing efficiency.     

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.     

Co‐movements and Correlations Across Asian Securitized Real Estate and Stock Markets

We find conditional real estate‐stock correlations at the local, regional and global levels are time varying and asymmetric in some cases for our sample of eight Asian securitized real estate markets over 1995–2009. Real estate–global stock correlations co‐move significantly and positively with real estate–regional stock correlations and real estate–local stock correlations. They are also influenced significantly by relative (real estate/stock) volatilities and their lags at three integration levels. Furthermore, real estate and stock volatilities, covariances and correlations increased from the preglobal financial crisis period to the crisis period. However, real estate and stock volatility are more important than correlation in causing the changes in covariance during both the precrisis and crisis periods. Finally, exchange rate volatility appears to have played a relatively less important role in these cross real estate–stock correlations.     

Do Real Estate Prices and Stock Prices Move Together? An International Analysis

The relationship between stock prices and real estate prices has been the subject of substantial debate in both the academic and practitioner literatures. Existing studies have focused on the time series of stock and real estate returns using data from a single country, such as the U.S. By necessity, these studies examine return and price changes over short intervals, creating a bias when property values are smoothed from year to year. Using data from 17 different countries over 14 years, this paper examines the relation between stock returns and changes in property values and rents. Consistent with other country-specific studies, we find that, with the exception of Japan, the contemporaneous relation between yearly real estate price changes and stock returns is not statistically significant. However, when the data are pooled across countries and when we look at longer measurement intervals, a significant relation between stock returns and both rents and value changes becomes apparent. Real estate prices are also found to be significantly influenced by GDP growth rates and provide a good long-term hedge against inflation but a poor year-to-year hedge.     

The Integration of Commercial Real Estate Markets and Stock Markets

This paper tests whether commercial real estate markets (both exchange-traded and non-exchange-traded) are integrated with stock markets using multifactor asset pricing models. The results support the hypothesis that the market for exchange-traded real estate companies, including REITs, is integrated with the market for exchange-traded (non-real-estate) stocks. Moreover, the degree of integration has significantly increased during the 1990s. However, when appraisal-based returns (adjusted for smoothing) are used to construct real estate portfolio returns, the results fail to support the integration hypothesis, although this may reflect the inability of these estimated private market returns to accurately proxy for commercial real estate returns. Interestingly, the growth rate in real per capita consumption is consistently priced in both commercial real estate markets and stock markets, whereas previous studies have found mixed evidence on the role of consumption in explaining ex ante stock returns.     

Uncertainty premia in REIT returns

We provide a systematic study of how financial and real estate uncertainty affect the aggregate return performance of the U.S. REIT market from 1994 to 2017. A temporal causality analysis reveals a negative uncertainty impact on REIT returns. The asset pricing analysis confirms the predictive relation and suggests that REITs are statistically significantly exposed to changes in market-wide uncertainty, for which investors require a return compensation. We also identify economic state variables to explain time-varying uncertainty exposures as well as periodic hedging characteristics of REITs. Finally, we find evidence that the source of uncertainty matters for compensating expected REIT returns.     

Public Information and Abnormal Returns in Real Estate Investment

This study performs empirical tests of the semistrong form efficiency of a real estate investment market. An asset pricing model is utilized to estimate the abnormal returns resulting from two types of public information, major changes in government tax shelter and rent control policies as well as unanticipated changes in interest rates. In both cases the results find an absence of significant abnormal returns and no evidence to suggest that real estate investors can utilize information concerning government policy changes or interest rate movements to earn higher returns on a risk-adjusted basis. In general the findings of this study conform to the semistrong form version of the efficient markets hypothesis.     

REIT Stock Market Volatility and Expected Returns

We study the relation between REIT stock volatility and future returns, focusing particularly on the financial crisis period of 2007–2009. There is ongoing debate about whether stock volatility can forecast future returns. Our findings suggest that REIT‐implied volatility is negatively related to contemporaneous stock returns; there is a significant positive relationship between REIT implied volatility and future stock volatility; and there is a significant negative relation between REIT implied volatility and future stock returns. Lastly, we develop trading rules based on REIT implied volatility to test whether these relationships are exploitable. The result suggests a potentially profitable trading strategy.     

On the Time-Series Properties of Real Estate Investment Trust Betas

The relation between real estate investment trust (REIT) returns and stock market returns is of significant importance to investors, practitioners and academics. The temporal properties of this relationship have a critical impact on the usefulness of REIT risk estimates and portfolio allocations to this asset class. Recent studies have suggested a decline in the market betas of equity real estate investment trusts (EREITs). This study applies a rigorous statistical test of the hypothesis that the market betas of EREITs have remained unchanged during the 1972 through 2002 time period. There is weak evidence of a downward trend in EREIT betas using a single-factor model; however, the hypothesis is not rejected when using a three-factor model.     

The Long-Run Performance of REIT Stock Repurchases

This study investigates the long-horizon performance of open-market stock repurchases for real estate investment trusts (REITs). We develop a new methodology to model the autocorrelation of monthly returns into long-horizon buy-and-hold abnormal return estimators. Serial correlation can introduce bias (autocorrelation bias) because the bid-ask bounce may affect monthly returns for sample firms and non-sample firms in a different fashion. Previous long-horizon event studies have overlooked this source of bias. There is compelling evidence that the market underreacts to the stock repurchase announcements. The evidence holds for different measures of the variance and the effects of cross-correlation of abnormal returns. Results are also robust to the traditional buy-and-hold abnormal return and the wealth relative estimators. We investigate the nature of the underreaction and find strong support for the undervaluation hypothesis.     

Liquidity, Return and Order-Flow Linkages Between REITs and the Stock Market

This article represents the first exploration of liquidity and order flow spillovers across New York Stock Exchange stocks and real estate investment trusts (REITs). Impulse response functions and Granger causality tests indicate the existence of persistent liquidity spillovers running from REITs to non-REITs. Specifically, REIT liquidity indicators are forecastable from non-REIT ones, at both daily and monthly horizons. I also provide evidence of a liquidity premium inherent in REIT returns. While REIT prices appear to be set efficiently in that neither REIT nor non-REIT order flows forecast REIT returns, I find that order flows and returns in the stock market negatively forecast REIT order flows. This result is consistent with the notion that real estate markets are viewed as substitute investments for the stock market, which causes down-moves in the stock market to increase money flows to the REIT market.     

Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?

A transactions-driven commercial real estate return series is generated in this study to determine whether the reliance on appraised values in the estimation of real estate returns is the source of the reported underpricing of real estate relative to stocks, bonds, and bills when analyzed in a traditional mean-variance setting. The reported underpricing of commercial real estate would be rational if transactions-driven returns exhibit more variance than appraisal-driven returns. While we find that transactions-driven real estate returns have greater variance than appraisal-driven returns for individual properties, most of the individual property risk is idiosyncratic and diversified away at the portfolio level. Real estate continues to be a dominate asset class in mean-variance allocation models even when represented with transactions-driven indices.¹