Revisiting Non-normal Real Estate Return Distributions by Property Type in the U.S.

In this updated empirical analysis, investment risk models with infinite variance are more descriptive of distributions of individual property returns in the NCREIF database over the period 1980 to 2003 than Normally distributed risk models. Real estate investment risk is heteroskedastic, but the Characteristic Exponent of the investment risk function is nearly constant across time although differences among property types are evident. Accordingly, asset diversification is far less effective at reducing the impact of non-systematic investment risk on real estate portfolios than in the case of assets with Normally distributed investment risk. The patterns found in the U.S. are the same in Australia and the United Kingdom, and the Characteristic Exponents are virtually identical across all three countries.