Private Real Estate Returns, Style Drift, and Procyclical Risk Taking
USC Lusk Center of Real Estate Working Paper Series, 2020
27 Pages Posted: 17 Jun 2020
Date Written: May 15, 2020
This paper documents that development exposure is an important determinant of private real estate returns and market risk exposure. It also documents that open-end private real estate funds have time-varying, procyclical market risk exposure through their development activities. As such, these funds are disproportionately exposed to the downside of the market cycle. Lastly, I find that fund flow pressure is the primary driver of time-varying development exposure. Funds buy a higher proportion of safe, liquid assets compared to risky, illiquid assets when they have larger unfulfilled subscriptions. While this increases assets under management quicker, it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial. Additionally, funds stop developing as redemption requests increase, leading to lower market risk exposure when the market recovers.
Keywords: Asset Pricing, Risk Factors, Factor Loadings, Commercial Real Estate
JEL Classification: G11, G12, G13, G14, G23, R33
Suggested Citation: Suggested Citation