Are Public and Private Asset Returns and Risks the Same? Evidence from Real Estate Data

Abstract

This article aims to investigate the similarity of public and private real estate returns and risks over the relatively long horizon using data for the U.S and the U.K. The results show evidence of a one-to-one relationship between publicly traded REIT performance and privately traded direct real estate investment performance in three out of four U.S. real estate sectors and one out of two U.K. sectors included in the analysis. The return volatilities generally do not differ significantly between the REIT and direct real estate markets regardless of sector and investment horizon. The findings have important practical implications. First, they indicate that public and private real estate investments can be considered to work as good substitutes in an investment portfolio with several years investment horizon. Second, they suggest that REIT related ETFs and derivatives could be used to hedge risks caused by investors’ direct real estate holdings or by lending institutions’ mortgage lending inventory.

Keywords: REIT; Real estate; Return; Risk; Hedging; Portfolio allocation

JEL Classification: G11, G12, C32