The Predictability of Real Estate Excess Returns: An Out-of-Sample Economic Value Analysis

45 Pages Posted: 31 Oct 2019 Last revised: 5 Jun 2020

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University - Department of Finance

Manuela Pedio

University of Bristol; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Milena Petrova

Syracuse University - Whitman School of Management; Bocconi University

Date Written: October 1, 2019

Abstract

We study the recursive, out-of-sample realized predictive performance of a rich set of predictor choices and models, spanning linear and Markov switching frameworks when the forecast target is represented by excess NCREIF and equity NAREIT returns. We find considerable pockets of predictive power, especially at the short- and intermediate horizons and for private real estate returns, both in absolute term and in comparison to a simple, but powerful, historical sample mean benchmark. We then test whether such forecasting accuracy may translate to positive, risk-adjusted out-of-sample performance in a recursive mean-variance portfolio allocation exercise, selecting weights of stocks, bonds, cash, and real estate (private or public). Consistently, we find that especially in the case of private real estate, significant improvements in realized Sharpe ratios and mean-variance utility scores are achieved from a range of strategies, exploiting predictability at intermediate horizons, especially when supported by Markov switching models. These results are robust the inclusion of transaction costs and extend to public real estate.

Keywords: public real estate, REITs, private real estate, predictability, mean-variance portfolios

Suggested Citation

Guidolin, Massimo and Pedio, Manuela and Petrova, Milena, The Predictability of Real Estate Excess Returns: An Out-of-Sample Economic Value Analysis (October 1, 2019). BAFFI CAREFIN Centre Research Paper No. 2019-122, Available at SSRN: https://ssrn.com/abstract=3477328 or http://dx.doi.org/10.2139/ssrn.3477328

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Manuela Pedio

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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

Via Sarfatti, 25
Milan, 20136
Italy

Milena Petrova

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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