On Indexing Commercial Real Estate Properties and Portfolios

Posted: 6 Nov 2013

See all articles by Walter Boudry

Walter Boudry

Cornell University

N. Edward Coulson

Pennsylvania State University, College of the Liberal Arts - Department of Economic; National Bureau of Economic Research (NBER)

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Date Written: November 5, 2013

Abstract

Commercial real estate indices play an important role in performance evaluation and overall investment strategy. However, the issue of how representative they are of the returns on portfolios of commercial properties is an open issue. Our study addresses this topic by analyzing a sample of 14,427 repeat sales transactions between Q4 2000 and Q2 2011. We find that the aggregate real estate indices (Moody's REAL CPPI) do a good job of tracking real returns when portfolios of more than 20 properties are considered. At this level, tracking is somewhat less effective than our benchmark of the S P500 and its component stocks. Compared to the average root mean squared deviation (FMSD) from one asset, randomly selected portfolios with 20 assets reduce the RMSD by 75% for the S P500 compared to 66% for the aggregate index. These results suggest that the aggregate indices can be effective in hedging and evaluating the performance of direct real estate investment. We further find that tracking at the property type level provides little benefit over using an aggregate index. These results suggest that the aggregate indices can be effective in hedging and evaluating the performance of direct real estate investment. We further find that tracking at the property level provides little benefit over using an aggregate index. However, indexing using a property type and location matched index provides lower tracking error for any level of diversification.

Keywords: Indexing; Basis risk; Real estate portfolios

Suggested Citation

Boudry, Walter and Coulson, N. Edward and Liu, Crocker Herbert, On Indexing Commercial Real Estate Properties and Portfolios (November 5, 2013). Journal of Real Estate Finance and Economics, Vol. 47, No. 4, 2013. Available at SSRN: https://ssrn.com/abstract=2350336

Walter Boudry (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

N. Edward Coulson

Pennsylvania State University, College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
814-863-0625 (Phone)
814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Crocker Herbert Liu

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

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