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Market Risk of Real Estate: Using Indirect Data to Understand Direct Risks

The Journal of Financial Perspectives, 2012

10 Pages Posted: 9 Nov 2012 Last revised: 7 Jul 2017

Felix Schlumpf

Zurich Insurance Company Ltd

Genene Tessera

Zurich Insurance Company Ltd

Catalina Martínez Gutiérrez

University of Zurich; Zurich Insurance Company Ltd; The Graduate Institute, Geneva

Date Written: October 24, 2012

Abstract

Even if the market capitalization of direct real estate is comparable to that of equities and fixed income, the data on direct real estate is very poor. It is, therefore, difficult to estimate the market risk of this important asset class. Moreover, risk systems from most vendors cover equities and fixed income, but do not cover direct real estate. We propose a simple methodology that uses widely available data on indirect real estate to estimate the market risk of direct real estate. In particular, we use data on Real Estate Investment Trusts (REITs) returns, determine their factor exposures to other asset classes and deleverage these exposures according to REITs’ balance sheets. We show that direct real estate can be considered as a portfolio of equities, fixed income and credit combined with idiosyncratic risk. We find that the existing direct indices understate the risk of the real estate market. In addition, with our methodology, the correlations to other asset classes become materially different and higher.

Keywords: public and private real estate, real estate risk, mixed-asset diversification

JEL Classification: G11, G23, R33, C32

Suggested Citation

Schlumpf, Felix and Tessera, Genene and Martínez Gutiérrez, Catalina, Market Risk of Real Estate: Using Indirect Data to Understand Direct Risks (October 24, 2012). The Journal of Financial Perspectives, 2012. Available at SSRN: https://ssrn.com/abstract=2172299 or http://dx.doi.org/10.2139/ssrn.2172299

Felix Schlumpf (Contact Author)

Zurich Insurance Company Ltd ( email )

Mythenquai 2
Zurich, CH-8022
Switzerland

HOME PAGE: http://www.zurich.com

Genene Tessera

Zurich Insurance Company Ltd ( email )

Mythenquai 2
Zurich CH-8022
Switzerland

HOME PAGE: http://www.zurich.com/

Catalina Martínez Gutiérrez

Zurich Insurance Company Ltd ( email )

Zurich, 8022
Switzerland

The Graduate Institute, Geneva ( email )

Rue de Lausanne 132
P.O. Box 136
Geneva, 1211
Switzerland

University of Zurich ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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