A Comparative Anatomy of Residential REITs and Private Real Estate Markets: Returns, Risks and Distributional Characteristics

32 Pages Posted: 17 Feb 2015

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Richard Roll

California Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: Spring 2015

Abstract

Real Estate Investment Trusts (REITs) are the only truly liquid assets related to residential real estate investments. We study the behavior of U.S. Residential REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about 0.58. Decomposing their covariances into principal components reveals several strong factors. Residential REIT characteristics differ to some extent from those of the S&P/Case‐Shiller (SCS) private real estate markets. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in residential real estate is far more risky than what might be inferred from the widely followed SCS series. Although the SCS and REITs indicate little support for being able to predict each other, there is strong evidence of self‐predictability for the series.

Suggested Citation

Cotter, John and Roll, Richard W., A Comparative Anatomy of Residential REITs and Private Real Estate Markets: Returns, Risks and Distributional Characteristics (Spring 2015). Real Estate Economics, Vol. 43, Issue 1, pp. 209-240, 2015, Available at SSRN: https://ssrn.com/abstract=2566015 or http://dx.doi.org/10.1111/1540-6229.12059

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Richard W. Roll

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