Searching for a Common Factor in Public and Private Real Estate Returns
Posted: 12 Oct 2012 Last revised: 2 Oct 2017
Date Written: April 16, 2013
Abstract
We introduce a methodology to estimate common real estate returns and cycles across public and private real estate markets. We first place REIT indices and direct real estate — NCREIF appraisal-based and transaction-based indices (NPI and NTBI) — on a comparable basis by adjusting for leverage and sector. We extract a common real estate factor, which is allowed to be persistent, from all these markets. Individual real estate indices load on this common factor and they also are driven by persistent, idiosyncratic shocks. The common real estate factor is pro-cyclical and has low correlations with standard systematic factors from public markets. Short-run idiosyncratic deviations from the common real estate factor load on several capital market factors for REITs and on liquidity factors for direct real estate.
Keywords: Real Estate, Direct Real Estate Investments, REITs
JEL Classification: G12
Suggested Citation: Suggested Citation
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