Real Estate

Are returns on real estate usefully predictable? In the June 2012 version of their book chapter entitled “Forecasting Real Estate Prices”, Eric Ghysels, Alberto Plazzi, Walter Torous and Rossen Valkanov examine the evidence of predictability in U.S. residential and commercial real estate markets. They review methodologies used in constructing widely used real estate price indexes. They then survey the key empirical findings from academic studies of short-run momentum and long-run reversals in real estate returns. Finally, they test the ability of different variables (past stock market return, stock market dividend yield, 3-month Treasury bill (T-bill) yield relative to its 12-month moving average, inflation rate, term spread between 5-year and 3-month maturities, combination of forward interest rates and industrial production growth) to predict real estate returns as calculated from several price indexes and a real estate investment trust (REIT) index. Using monthly and quarterly index levels for the real estate market proxies and values for the predictive variables as available, focusing on 1991 through 2010, they find that: Keep Reading

Kathleen Peddicord, publisher of the Live and Invest Overseas group, opens her 2013 book, How to Buy Real Estate Overseas, by stating: “The idea of diversifying your investments, your assets, your life and your future overseas can seem frightening, intimidating, even paralyzing. Could you really do it? Yes, you could. I say that based on 30 years of experience at this.” The book takes the perspective of a U.S. citizen seeking to diversify assets via direct ownership of non-U.S. real estate. Using examples based on her experience investing in real estate in 20 countries and operating businesses in seven, she concludes that: Keep Reading

How should investors view illiquid assets? In the January 2013 draft of his book chapter titled “Illiquid Asset Investing”, Andrew Ang summarizes the characteristics of investments in illiquid assets. Illiquid investments typically exhibit infrequent trading, small trades (in terms of number of units) and low turnover. Examples are hedge funds (to some degree), real estate and aesthetic investments such as art and jewels. He does not address the largest illiquid component of an individual’s wealth, human capital. Based on available research, he concludes that: Keep Reading

Which asset class best hedges inflation? In the September 2012 draft of his book chapter entitled “‘Real’ Assets”, Andrew Ang examines the behaviors of the following assets commonly thought to hold their value during times of high inflation (“real” assets): inflation-linked bonds, commodities, real estate and U.S. Treasury bills (T-bill). He focuses on inflation as year-over-year change in the U.S. Consumer Price Index for all urban consumers and all items, but considers also inflation rates for medical care and higher education. He distinguishes inflation hedging (measured by correlation of returns and inflation) from long-run asset class performance. Using asset class proxy returns and U.S. inflation rates as available through 2011, he finds that: Keep Reading

Are valuation metrics for Real Estate Investment Trusts (REIT) useful indicators of future returns? In his June 2012 paper entitled “Modern Portfolio Theory as Applied to REITs”, Jeffrey Kerrigan evaluates the value premium among REITs. At the end of each month, he reforms equally weighted portfolios of the fifths (quintiles) of REIT stocks with the highest and lowest book-to-market price ratios and calculates the returns of these portfolios over the next month. He estimates the REIT value premium based on the difference in performance between these two portfolios. Using monthly returns for 93 REITs as available during December 1995 through March 2012, he finds that: Keep Reading

Does timing based on simple moving averages (SMA) work for U.S. Real Estate Investment Trust (REIT) indexes? If so, which moving average is best? In his March 2012 paper entitled “The Market Timing Power of Moving Averages: Evidence from US REIT Indexes”, Paskalis Glabadanidis tests the effectiveness of SMAs for timing ten value-weighted and ten similar equal-weighted U.S. REIT indexes. A monthly close above (below) its SMA signals investment in the REIT index (cash, estimated as the 30-day U.S. Treasury bill yield) the next month. He focuses on a 24-month SMA, but includes robustness tests based on 6-month, 12-month, 36-month, 48-month and 60-month SMAs. He applies baseline one-way trading frictions of 0.5% for entering and exiting a REIT index. Using monthly value-weighted and equal-weighted levels of ten U.S. REIT indexes during 1980 through 2010 (31 years), he finds that: Keep Reading

A reader asked whether 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 March 2012 (320 monthly returns), we find that: Keep Reading

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: Keep Reading

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: Keep Reading

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: Keep Reading