Risk measures for direct real estate investments with non-normal or unknown return distributions

Carsten Lausberg (), Stephen Lee (), Moritz Müller (), Cay Oertel () and Tobias Schultheiß ()
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Carsten Lausberg: Nürtingen-Geislingen University
Stephen Lee: City University London
Moritz Müller: Müller Merkle Immobilien GmbH
Cay Oertel: University of Regensburg
Tobias Schultheiß: Blackbird Real Estate GmbH

Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), 2020, vol. 6, issue 1, No 2, 3-27

Abstract: Abstract The volatility of returns is probably the most widely used risk measure for real estate. This is rather surprising since a number of studies have cast doubts on the view that volatility can capture the manifold risks attached to properties and corresponds to the risk attitude of investors. A central issue in this discussion is the statistical properties of real estate returns—in contrast to neoclassical capital market theory they are mostly non-normal and often unknown, which render many statistical measures useless. Based on a literature review and an analysis of data from Germany we provide evidence that volatility alone is inappropriate for measuring the risk of direct real estate. We use a unique data sample by IPD, which includes the total returns of 939 properties across different usage types (56% office, 20% retail, 8% others and 16% residential properties) from 1996 to 2009, the German IPD Index, and the German Property Index. The analysis of the distributional characteristics shows that German real estate returns in this period were not normally distributed and that a logistic distribution would have been a better fit. This is in line with most of the current literature on this subject and leads to the question which indicators are more appropriate to measure real estate risks. We suggest that a combination of quantitative and qualitative risk measures more adequately captures real estate risks and conforms better with investor attitudes to risk. Furthermore, we present criteria for the purpose of risk classification.

Keywords: Risk management; Volatility; Normal distribution; Risk measures (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1365/s41056-019-00028-x

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