A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics

Posted: 1 Dec 2010

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Richard Roll

California Institute of Technology

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Abstract

Real Estate Investment Trusts (REITs) are the only truly liquid assets related to real estate investments. We study the behavior of U.S. REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about .65. Decomposing their covariances into principal components reveals several strong factors. REIT characteristics differ to some extent from those of the S&P/Case-Shiller (SCS) residential real estate indexes. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in real estate is far more risky than what might be inferred from the widely-followed SCS series.

JEL Classification: G1

Suggested Citation

Cotter, John and Roll, Richard W., A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics. 46th Annual AREUEA Conference Paper, Available at SSRN: https://ssrn.com/abstract=1716997

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University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

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Richard W. Roll

California Institute of Technology ( email )

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