REITS and Underlying Real Estate Markets: Is There a Link?

Pavlov, Andrey D.; Wachter, Susan M.

doi:10.2139/ssrn.1879968

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REITS and Underlying Real Estate Markets: Is There a Link?

U of Penn, Inst for Law & Econ Research Paper No. 11-20

71 Pages Posted: 7 Jul 2011

See all articles by Andrey D. Pavlov

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: June 27, 2011

Abstract

This paper utilizes the Carlson, Titman, and Tiu (2010) model of REIT returns to estimate the strength of the relationship between REIT and underlying real estate returns. Our work further offers an innovative method for computing the returns of the real estate properties underlying each REIT using the Moody’s/REAL commercial property price indices by region and property type. We find a statistically significant relationship between REIT and real estate returns only in the office sector. Other property types offer only very weak and insignificant relationships. This finding suggests that direct real estate investment or investment through the property price index derivatives cannot be replicated using REITs.

Keywords: property price index, real estate investment trusts, real estate returns, commercial real estate, property prices, local agglomeration effects, closed-end mutual fund

JEL Classification: G18, G28, R33

Suggested Citation: Suggested Citation

Pavlov, Andrey D. and Wachter, Susan M., REITS and Underlying Real Estate Markets: Is There a Link? (June 27, 2011). U of Penn, Inst for Law & Econ Research Paper No. 11-20, Available at SSRN: https://ssrn.com/abstract=1879968 or http://dx.doi.org/10.2139/ssrn.1879968