The Relative Importance of Stock, Bond and Real Estate Factors in Explaining REIT Returns
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
This paper examines the link between REIT, financial asset and real estate returns, and tests whether it changed subsequent to the “REIT boom” of the early 1990s. The main focus is on answering the question do REIT returns now better reflect the performance of underlying direct (unsecuritized) real estate? We develop and implement a variance decomposition for REIT returns that separates REIT return variability into components directly related to major stock, bond, and real estate-related return indices, as well as idiosyncratic or sector-specific effects. This is applied to aggregate REIT sector (NAREIT) returns as well as returns to size and property-type based REIT portfolios. Our results show that the REIT market went from being driven largely by the same economic factors that drive large cap stocks through the 1970s and 1980s to being more strongly related to both small cap stock and real estate-related factors in the 1990s. There is also a steady increase over time in the proportion of volatility not accounted for by stock, bond or real estate related factors. We also find that small cap REITs are “more like real estate” compared to larger cap REITs, at least over the 1993–1998 period. We argue that this could be a result of the institutionalization of the ownership of larger cap REITs that took place in the 1990s.
Barkham, R., and D. Geltner. (1995). “Price Discovery in American and British Property Markets,” Real Estate Economics 23, 21–44.
Bikhchandani, and Sharma. (2000). “Herd Behavior in Financial Markets: A Review,” IMF Working Paper #0048.
Campbell, J. Y., M. Lettau, B. G. Malkiel, and Y. Xu. (2001). “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk,” Journal of Finance 56.
Chan, S. H., W. K. Leung, and K. Wang. (1998). “Institutional Investment in REITs: Evidence and Implications,” Journal of Real Estate Research 16, 357–374.
Ciochetti, B., T. Craft, and J. Shilling. (2000). “Characteristics of Institutional Investment in Real Estate Investment Trusts,” Real Estate Research Institute Working Paper.
Clayton, J., and G. MacKinnon. (2000). “Measuring and Explaining REIT Liquidity: Moving Beyond the Bid-Ask Spread,” Real Estate Economics 28(1), 89–115.
Corgel, J., W. McIntosh, and S. Ott. (1995). “Real Estate Investment Trusts: A Review of the Financial Economics Literature,” The Journal of Real Estate Literature 3, 13–43.
Fama, E., and K. French. (1993). “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33, 3–56.
Fisher, J., and D. Geltner. (2000). “De-Lagging the NCREIF Index: Transaction Prices and Reverse-Engineering,” Real Estate Finance Spring, 7–22.
Fisher, J., D. Geltner, and B. Webb. (1994). “Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods.” Journal of Real Estate Finance and Economics 9, 137–164.
Geltner, D., and W. Goetzmann. (2000). “Two Decades of Commercial Property Returns: A Repeated Measures Regression-Based Version of the NCREIF Index,” Journal of Real Estate Finance and Economics 21, 5–21.
Geltner, D., and N. Miller. (2001). Commercial Real Estate Analysis and Investments. Upper Saddle River, NJ: Prentice-Hall.
Geltner, D., and J. Rodriguez. (1998). “Public and Private Real Estate: Performance Implications for Asset Allocation.” In R. Garrigan and J. Parsons (eds), Real Estate Investment Trusts: Structure, Analysis and Strategy. New York: McGraw-Hill.
Ghosh, C., M. Miles, and C. F. Sirmans. (1996). “Are REITs Stocks?” Real Estate Finance Fall, 46–53.
Giliberto, M. (1990). “Equity Real Estate Investment Trusts and Real Estate Returns,” The Journal of Real Estate Research 5, 259–263.
Giliberto, M. (1993). “Measuring Real Estate Returns: The Hedged REIT Index,” Journal of Portfolio Management Spring, 94–99.
Glascock, J., C. Lu, and R. So. (2000). “Further Evidence on the Integration of REIT, Bond, and Stock Returns,” The Journal of Real Estate Finance and Economics 20, 177–194.
Graff, R., and M. Young. (1997). “Institutional Investor Impact on Equity REIT Performance,” Real Estate Finance Fall, 31–39.
Karolyi, G. A., and A. Sanders. (1998). “The Variation of Economic Risk Premiums in Real Estate Returns,” The Journal of Real Estate Finance and Economics 17, 245–262.
Khoo, T., D. Hartzell, and M. Hoesli. (1993). “An Investigation of the Change in Real Estate Investment Trust Betas,” Real Estate Economics 21, 107–130.
Ling, D., and A. Naranjo. (1997). “Economic Risk Factors and Commercial Real Estate Returns,” The Journal of Real Estate Finance and Economics 14, 283–307.
Ling, D., and A. Naranjo. (1999). “The Integration of Commercial Real Estate Markets and Stock Markets,” Real Estate Economics 27, 483–516.
Malkiel, B. G., and Y. Xu. (1999). “Have Individual Stocks Become More Volatile?,” Working Paper, Princeton University.
Mei, J., and A. Lee. (1994). “Is There a Real Estate Factor Premium?” The Journal of Real Estate Finance and Economics 9, 113–126.
McIntosh, W., and Y. Liang. (1998). REITs: What Are They? Parsippany, NJ: Prudential Real Estate Investors.
Nofsinger, J., and R. Sias. (1999). “Herding and Feedback Trading by Institutional and Individual Investors,” Journal of Finance 54, 2263–2295.
Pagan, A. (1984). “Econometric Issues in the Analysis of Regressions with Generated Regressors,” International Economic Review 25, 221–47.
Peterson, J., and C. Hsieh. (1997). “Do Common Risk Factors in the Returns on Stocks and Bonds Explain Returns on REITs?” Real Estate Economics 25, 321–345.
Seck, D. (1996). “The Substitutability of Real Estate Assets,” Real Estate Economics 24, 75–96.
Seiler, M., J. Webb, and N. Myer. (2001). “Can Real Estate Portfolios Be Rebalanced/Diversified Using Equity REIT Shares?” Journal of Real Estate Portfolio Management 1, 25–42.
Wang, K. J. Erickson, G. Gau, and S. Han Chan. (1995). “Market Microstructure and Real Estate Returns,” Real Estate Economics 23, 85–99.
White, H. (1980). “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity,” Econometrica 48: 817–838.
Ziering, B., B. Winograd, and W. McIntosh. (1997). The Evolution of Public and Private Market Investing in the New Real Estate Capital Markets. Parsippany, NJ: Prudential Real Estate Investors.
- The Relative Importance of Stock, Bond and Real Estate Factors in Explaining REIT Returns
The Journal of Real Estate Finance and Economics
Volume 27, Issue 1 , pp 39-60
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links
- REIT boom
- variance decomposition
- real estate factor
- rolling regression
- institutional ownership
- Industry Sectors
- Author Affiliations
- 1. Department of Finance, College of Business Administration, University of Cincinnati, PO Box 210195, Cincinnati, OH, 45221-0195
- 2. Department of Finance and Management Science, Frank H. Sobey Faculty of Commerce, Saint Mary's University, Halifax, Nova Scotia, B3H 3C3