Linkages between Direct and Securitized Real Estate

38 Pages Posted: 7 Jul 2009 Last revised: 30 May 2017

See all articles by Elias Oikarinen

Elias Oikarinen

University of Turku, Department of Economics

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Geneva - Research Center for Statistics; University of Aberdeen - Business School

Camilo Serrano

IAZI AG - CIFI SA

Date Written: June 30, 2009

Abstract

Using data for the 1978-2008 period, this study presents evidence for cointegration between securitized (NAREIT) and direct (NCREIF) total return indices. Cointegration between the indices indicates that REITs and direct real estate are substitutable in the portfolio of a long-horizon buy-and-hold investor. Since the real estate indices are not found to be cointegrated with the stock market, REITs and direct real estate are likely to have similar long-term diversification benefits in a stock portfolio. In line with prior expectations, only direct real estate is found to currently adjust towards the cointegrating relation, with NAREIT returns leading NCREIF returns. However, giving support to the often stated argument regarding weaker informational efficiency of the REIT market prior to the 'new REIT era', the results show evidence for the predictability of NAREIT returns during the 1980s. It is also found that at the beginning of the 'new REIT era' a large and long-lasting deviation from the long-run relation between NAREIT and NCREIF emerged. However, there is no evidence of a permanent structural break in the long-run relation since the deviation appears to have been only temporary.

Keywords: cointegration, Vector Error-Correction Models, direct real estate, securitized real estate, REITs, diversification

JEL Classification: G11, G14, C32

Suggested Citation

Oikarinen, Elias and Hoesli, Martin Edward Ralph and Serrano, Camilo, Linkages between Direct and Securitized Real Estate (June 30, 2009). Swiss Finance Institute Research Paper No. 09-26; 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1427794 or http://dx.doi.org/10.2139/ssrn.1427794

Elias Oikarinen

University of Turku, Department of Economics ( email )

Turku, FIN-20500
Finland

Martin Edward Ralph Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics ( email )

Geneva
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Camilo Serrano (Contact Author)

IAZI AG - CIFI SA ( email )

Tramstrasse 10
Zurich, CH-8050
Germany

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