Real Estate

How do pension funds, arguably representative of sophisticated and conservative investors, use real estate as an alternative investment? In their January 2012 paper entitled “Value Added From Money Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate”, Aleksandar Andonov, Piet Eichholtz and Nils Kok investigate the allocation, costs and performance of pension funds with respect to real estate investments. Using self-reported investment data for 884 U.S., Canadian, European and Australian/New Zealand pension funds during 1990 through 2009, they find that: More…

Do real estate investments protect investors from inflation? In their November 2011 paper entitled “Inflation and Real Estate Investments”, Bradford Case and Susan Wachter examine whether real estate investment returns protect consumers from loss of purchasing power. They focus on publicly traded stocks of U.S. equity real estate investment trusts (REIT) as the most transparent source of real estate returns and compare the inflation protection of these returns to those of other assets. They compare returns directly to the inflation rate rather than calculating return-inflation rate correlations. Specifically, they establish a base scenario that: (1) assumes an investment horizon of six months; (2) focuses on the six-month intervals during which annualized inflation exceeds its median (3.2% for the sample); and, (3) measures the frequency with which returns equal or exceed inflation during these high-inflation intervals. Using monthly U.S. consumer price index (CPI) and index return data for equity REITs, commodities, U.S. stocks (S&P 500 Index), U.S. TIPS and gold during January 1978 (modeled prior to January 1997 for TIPS) through August 2011 (399 overlapping six-month intervals), they find that: More…

Do Real Estate Investment Trusts (REIT) act effectively as a proxy for the real estate asset class? In their June 2011 paper entitled “REITs and Underlying Real Estate Markets: Is There a Link?”, Andrey Pavlov and Susan Wachter estimate the strength of the relationship between REIT and underlying real estate returns. Specifically, they relate REIT returns (unlevered based on debt and total capitalization data) to returns for shadow portfolios of Commercial Property Price Indices (CPPI) matched REIT-by-REIT based on geography and property type. They consider control variables such as interest rate changes, credit and term structure spreads, currency exchange rates, industrial production growth and commodity price changes. Using quarterly data for 2001 through 2007 for 71 REITs with a predominant property type, CPPI shadow portfolios, control variables and stock indexes, they find that: More…

Is there any reliable relationship between U.S. home prices and the U.S. stock market? For example, do falling home prices point to offsetting liquidation of equity positions, or do homes tend to diversify stock holdings? Using annual median sales prices for existing homes from RealEstateABC.com (1968-2004) and the National Association of Realtors (2005-2010) and contemporaneous annual S&P 500 Index data for 1968-2010 (43 years), we find that: More…

Does the  behavior of the stocks of homebuilders anticipate the overall  equity market? To check, we first assemble a simple index of the performance of homebuilder stocks as the equally-weighted  average monthly return for the stocks of DR  Horton, Hovnanian,  KB  Homes, Lennar,  Ryland and Pulte,  starting with Pulte in August 1985 and adding the  others as they are listed. Comparing these returns with monthly  returns for the S&P  500 Index data for August 1985 through January 2011 (306 monthly returns), we find that: More…

Are Real Estate Investment Trusts (REIT) as an asset class a good diversifier for the stock market? To check, we focus on monthly correlation of returns as a measure of diversification capacity for Vanguard REIT Index Fund Investor Shares (VGSIX), a mutual fund with a reasonably long track record “designed to track the performance of the MSCI US REIT Index.” We use S&P 500 Depository Receipts (SPY) as a proxy for the broad U.S. stock market. For comparison, we also consider returns for three REIT Exchange-Traded Funds (ETF): iShares Dow Jones US Real Estate (IYR), SPDR Dow Jones REIT (RWR), and Vanguard REIT Index ETF (VNQ). Using monthly dividend-adjusted returns for VGSIX and SPY for the period July 1996 through December 2010 (174 monthly returns), we find that: More…

Do real housing prices revert to some trend? If so, where do they stand now with respect to trend? In their February 2010 paper entitled “The Margin of Safety and House Price Turning Points: Observations from the US, the UK and Japan”, Mitsuru Mizuno and Isaac Tabner investigate real housing price deviation from and reversion to trend in three developed markets. Using quarterly measures of housing price, inflation, disposable income, GDP and rent from 1960 (UK), 1963 (U.S.) and 1977 (Japan) through 2009, they conclude that: More…

A reader asked: “Regarding ‘Combined Value-Momentum Tactical Asset Class Allocation’, have you developed any sort of screen or model that ranks value exactly as studied in the referenced paper (asset yield or earnings yield)?” More…

A reader suggested: “I’m an active real estate investor (private lending and passive income single and multi-family properties) and I sure wish I could find this kind of site for real estate investors. You all should venture out.” More…

While we normally do not stray far from the stock market, an article on the forecasting ability of commercial real estate gurus relates strongly to our ongoing investigation of investing expertise. Do these experts add value for investors in the relatively illiquid real estate market? In his 2005 paper entitled “A Random Walk Down Main Street: Can Experts Predict Returns on Commercial Real Estate?” David Ling examines the ability of institutional owners and managers to predict commercial real estate investment performance for various property types across major metropolitan markets. Using (1) predicted relative property returns (desirability rankings) for nine property types and 16 metropolitan markets from the Real Estate Research Corporation’s (RERC) quarterly Real Estate Investment Survey over a thirteen-year period and (2) corresponding National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index returns, he concludes that: More…