nach oben

The Journal of Real Estate Finance and Economics

Erschienen in:

01.11.2013

On Indexing Commercial Real Estate Properties and Portfolios

verfasst von: Walter I. Boudry, N. Edward Coulson, Jarl G. Kallberg, Crocker H. Liu

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 4/2013

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

Commercial real estate indices play an important role in performance evaluation and overall investment strategy. However, the issue of how representative they are of the returns on portfolios of commercial properties is an open issue. Our study addresses this topic by analyzing a sample of 12,427 repeat sales transactions between Q4 2000 and Q2 2011. We find that the aggregate real estate indices (Moody’s REAL CPPI) do a good job of tracking real returns when portfolios of more than 20 properties are considered. At this level, tracking is somewhat less effective than our benchmark of the S&P500 and its component stocks. Compared to the average root mean squared deviation (RMSD) from one asset, randomly selected portfolios with 20 assets reduce the RMSD by 75 % for the S&P500 compared to 66 % for the aggregate index. These results suggest that the aggregate indices can be effective in hedging and evaluating the performance of direct real estate investment. We further find that tracking at the property type level provides little benefit over using an aggregate index. However, indexing using a property type and location matched index provides lower tracking error for any level of diversification.

Vorheriger Artikel The London Commercial Property Price Index

Nächster Artikel Transaction Frequency and Commercial Property

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Of course there is an extensive literature dealing with the issue of idiosyncratic risk and stock returns; see, for example, Fu (2009).

For example, Collett et al. (2003) show how high transaction costs and illiquidity lead to very long holding periods for institutional real estate.

The National Association of Real Estate Investment Trusts (NAREIT) started to publish their REIT series in the early 1970’s. While REITs represent securitized commercial real estate, they are a hybrid between stock and underlying real estate. While studies such as Liu and Mei (1992) and Gyourko and Keim (1992) have shown that REITs are a leading indicator of the underlying private real estate market, controversy remains as to the extent to which REITs reflect the underlying real estate. Some notable studies include, but are not limited to, Barkham and Geltner (1995), Geltner and Goetzmann (2000), and Boudry et al. (2012).

See Fisher et al. (2003, 2004), Gatzlaff and Geltner (1998), and Geltner and Goetzmann (2000).

In contrast to stocks where an investor can purchase a single share of stock, a real estate investor cannot typically purchase one square foot of a property.

Our results do not appear overly sensitive to this cut off. We have tried running the aggregate sample with a $2 million filter and the results are similar. We use the smaller cut off to have more properties available for portfolio formation.

An examination of a sample of these “extreme” observations suggests they are much more likely to be data errors than actual transactions.

Using S&P500 component stocks, we find a similar relationship: the average standard deviation is twice as large at the individual stock level (22 %) as at the index level (11 %).

Crane and Hartzell (2010) find evidence that a disposition effect exists for REITs with REIT managers more likely to sell properties that have performed well. Fisher et al. (2004) similarly find that properties that have outperformed a national commercial real estate index have a greater likelihood of being sold. In a related study, Bokhari and Geltner (2011) find evidence that commercial property sellers exhibit loss aversion behavior, e. g., ask higher prices than otherwise similar sellers who do not face a loss.

Data we obtained from http://web.mit.edu/cre/research/credl/rca.html. The indices are now located at http://www.rcanalytics.com/Public/rca_indices.aspx

There are n!/k!(n–k)! random portfolios containing k properties that can be drawn from a window containing n total properties without repetition.

This restriction is imposed so that we aren’t repeatedly resampling the same portfolio of k assets. This is because as k approaches n, the number of unique portfolios declines.

The value of 5,000 was chosen because it is computationally feasible to generate this many portfolios repeatedly; see, e.g., Fama and French (2010). Our results do not change significantly in the aggregate sample if we increase this number to 100,000.

We use an equally weighted index because the repeat sales indices are equally weighted.

To provide a different context for this result, if we calculate the average R² from the monthly time series regression of portfolio returns on index returns for each of the buy and hold windows, we observe that the average R² starts at around 25 % for individual stocks and increases to 85 % at 40 stocks and reaches 92 % when we increase the number of stocks to 200.

This tracking error would be reduced if we made the selection of stocks sector neutral, just as we will see in the better tracking results when matching location in Table 2.

Bailey, M., Muth, R., & Nourse, H. (1963). A regression method for real estate price index construction. Journal of the American Statistical Association, 58, 933–942.CrossRef

Barkham, R., & Geltner, D. (1995). Price discovery in American and British property markets. Real Estate Economics (formerly AREUEA Journal), 23(1), 21–44.CrossRef

Bokhari, S., & Geltner, D. (2011). Loss aversion and anchoring in commercial real estate pricing: Empirical evidence and price index implications. Real Estate Economics, 39(4), 635–670.CrossRef

Boudry, W. I., Coulson, N.E., Kallberg, J.G. and Liu, C.H. (2012). On the Hybrid Nature of REITs. Journal of Real Estate Finance and Economics, forthcoming.

Brown, G., & Kapadia, N. (2007). Firm specific risk and equity market development. Journal of Financial Economics, 2(84), 358–388.CrossRef

Byrne, P., & Lee, S. L. (2003). An exploration of the relationship between size, diversification and risk in UK real estate portfolio: 1989–1999. Journal of Property Research, 20(2), 191–206.CrossRef

Campbell, J., Lettau, M., Malkiel, B., & Xu, Y. (2001). Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk. Journal of Finance, 56, 1–43.CrossRef

Case, K., & Shiller, R. (1989). The efficiency of the market for single-family homes. The American Economic Review, 79, 125–137.

Clapp, J., & Giaccotto, C. (1992). Estimating price trends for residential property: A comparison of repeat sales and assessed value methods. Journal of Real Estate Finance and Economics, 5, 357–374.CrossRef

Collett, D., Lizieri, C., & Ward, C. (2003). Timing and the holding periods of institutional real estate. Real Estate Economics, 31(2), 205–222.CrossRef

Crane, A. and Hartzell, J. (2010). Is There a Disposition Effect in Corporate Investment Decisions? Evidence from Real Estate Investment Trusts. Working paper, University of Texas

Dombrow, J., Knight, J., & Sirmans, C. F. (1997). Aggregation bias in repeat-sales indices. Journal of Real Estate Finance and Economics, 14, 75–88.CrossRef

Elton, E., & Gruber, M. (1977). Portfolio risk reduction: An analytical solution. Journal of Business, 50(4), 415–437.CrossRef

Evans, J. L., & Archer, S. H. (1968). Diversification and the reduction of dispersion: An empirical analysis. Journal of Finance, 23(5), 761–767.

Fama, E., & French, K. (2010). Luck versus skill in the cross-section of mutual fund returns. Journal of Finance, 65, 1915–1947.CrossRef

Feng, T., & Geltner, D. (2011). Property-level performance attribution: Investment management diagnostics and the investment importance of property management. Journal of Portfolio Management, 37(5), 110–124.CrossRef

Fisher, J., Gatzlaff, D., Geltner, D., & Haurin, D. (2003). Controlling for the impact of variable liquidity in commercial real estate price indices. Real Estate Economics, 31(2), 269–303.CrossRef

Fisher, J., Gatzlaff, D., Geltner, D., & Haurin, D. (2004). An analysis of the determinants of transaction frequency of institutional commercial real estate investment property. Real Estate Economics, 32(2), 239–264.CrossRef

Fisher, J., Geltner, D., & Pollakowski, H. (2007). A quarterly transactions-based index of institutional real estate investment performance and movements in supply and demand. Journal of Real Estate Finance and Economics, 34, 5–33.CrossRef

Fu, F. (2009). Idiosyncratic risk and the cross-section of expected stock returns. Journal of Financial Economics, 91, 24–37.CrossRef

Gatzlaff, D., & Geltner, D. (1998). A transaction-based index of commercial property and its comparison to the NCREIF index. Real Estate Finance, 15(1), 7–22.

Gatzlaff, D., and Haurin, D. (1994). Sample Selection and Biases in Local House Value Indices. Working paper, The Ohio State University.

Gatzlaff, D., & Haurin, D. (1997). Sample selection bias and repeat-sales index estimates. Journal of Real Estate Finance and Economics, 14, 33–50.CrossRef

Geltner, D., & Goetzmann, W. (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(1), 5–21.CrossRef

Geltner, D., & Kluger, B. D. (1998). REIT-based pure-play portfolios: The case of property types. Real Estate Economics, 26(4), 581–612.CrossRef

Goetzman, W., & Peng, L. (2006). Estimating house price indices in the presence of seller reservation prices. The Review of Economics and Statistics, 88, 100–112.

Gyourko, J., & Keim, D. B. (1992). What does the stock market tell Us about real estate returns. Real Estate Economics, 20(3), 457–485.CrossRef

Goodman, A. C., & Thibodeau, T. G. (2003). Housing market segmentation and hedonic prediction accuracy. Journal of Housing Economics, 12, 181–201.CrossRef

Hoag, J. W. (1980). Towards indices of real estate value and return. Journal of Finance, 35(2), 569–580.CrossRef

Horrigan, H., Case, B., Geltner, D., & Pollakowski, H. O. (2009). REIT-based property return indices: A New Way to track and trade commercial real estate. Journal of Portfolio Management, 35(5), 80–91.CrossRef

Kallberg, J. G., Liu, C. H., & Greig, D. W. (1996). The role of real estate in the portfolio allocation process. Real Estate Economics, 24(3), 359–377.CrossRef

Liu, C. H., & Mei, J. (1992). The Predictability of Returns on Equity REITs and Their Co-movement with Other Assets. Journal of Real Estate Finance and Economics, 5, 401–418.

MacKinnon, G. H., & Zaman, A. A. (2009). Real estate for the long term: The effect of return predictability on long-horizon allocations. Real Estate Economics, 37(1), 117–153.CrossRef

Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91.

Miles, M. E., Cole, R. E., & Guilkey, D. (1990). A different look at commercial real estate returns. Real Estate Economics, 18(4), 403–430.CrossRef

Riddiough, T. J., Moriarty, M., & Yeatman, P. J. (2005). Privately versus publicly held asset investment performance. Real Estate Economics, 33(1), 121–146.CrossRef

Rosen, S. (1974). Hedonic prices and implicit markets: Product differentiation in pure competition. Journal of Political Economy, 82, 34–55.CrossRef

Sharpe, W. (1964). Capital asset prices. Journal of Finance, 19(3), 425–442.

Statman, M. (1987). How many stocks make a diversified portfolio? Journal of Financial and Quantitative Analysis, 22(3), 353–363.CrossRef

Webb, R. B., Miles, M. E., & Guilkey, D. (1992). Transactions-driven commercial real estate returns: The panacea to asset allocation models? Real Estate Economics, 20(2), 325–357.CrossRef

Titel: On Indexing Commercial Real Estate Properties and Portfolios
verfasst von: Walter I. Boudry
N. Edward Coulson
Jarl G. Kallberg
Crocker H. Liu
Publikationsdatum: 01.11.2013
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 4/2013
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-013-9427-y

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 4/2013

Modeling Space Market Dynamics: An Illustration Using Panel Data for US Retail

Who Says there is a High Consensus Among Analysts when Market Uncertainty is High? Some New Evidence from the Commercial Real Estate Market

Are REIT IPOs Unique? The Global Evidence

The London Commercial Property Price Index

Transaction Frequency and Commercial Property

List Price Information in the Negotiation of Commercial Real Estate Transactions: Is Silence Golden?