How Smart Is the Real Estate Smart Beta? Evidence from Optimal Style Factor Strategies for REITs

41 Pages Posted: 24 Sep 2019

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University - Department of Finance

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Date Written: July 2019

Abstract

This paper has a twofold objective. First, we contribute to the stream of literature that investigates whether traditional asset pricing factors show any predictive power for the cross-section of Real Estate Investment Trust (REIT) returns. In particular, we investigate the existence of a premium associated to the Value, Size, Momentum, Investment, and Profitability factors over the period 1993-2018. We find support for all the pricing factors but for the Profitability one. Second, we investigate whether a set of smart beta strategies, based on the combination of the identified factors, may outperform similar allocation techniques that do not exploit factors. We find that all the proposed factor-based strategies display a higher risk-adjusted out-of-sample performance than a simple buy-and-hold investment in the real estate market (proxied by the FTSE NAREIT All REITs Index). In addition, we find that when factor-based strategies are implemented, REIT-only portfolios display risk-adjusted performances comparable to those of diversified portfolios that include equity, bond, and commodities.

Keywords: REITs, real estate factors, factor investing, smart beta strategies

JEL Classification: G11, G12, R30

Suggested Citation

Guidolin, Massimo and Pedio, Manuela, How Smart Is the Real Estate Smart Beta? Evidence from Optimal Style Factor Strategies for REITs (July 2019). BAFFI CAREFIN Centre Research Paper No. 2019-117, Available at SSRN: https://ssrn.com/abstract=3458308 or http://dx.doi.org/10.2139/ssrn.3458308

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Manuela Pedio

Bocconi University - CAREFIN - Centre for Applied Research in Finance ( email )

Via Sarfatti, 25
Milan, 20136
Italy

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