Local Beta: Has Local Real Estate Market Risk Been Priced in REIT Returns?

Bing Zhu () and Colin Lizieri
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Bing Zhu: Technical University of Munich

The Journal of Real Estate Finance and Economics, 2024, vol. 69, issue 4, No 4, 682-718

Abstract: Abstract This paper studies the pricing of the risk associated with the location of the assets. The local real estate market risk is measured by ‘local beta’, which combines the systematic risk of local property markets and the property allocation strategy of real estate firms. The empirical results confirm a higher equity return for a firm with higher exposure to the most volatile property markets, particularly for REITs which are more geographically concentrated. For REITs with highly diversified assets, local real estate risks are not reflected in REIT returns. For those REITs with most concentrated assets, a one standard deviation increase in the local beta will lead to a 4.7% increase in the annual return. Investors can use REITs’ local real estate risk as an information tool to construct a long-short investment portfolio of real estate firms and can achieve a significant non-market performance of 4.9% per annum.

Keywords: Geographic asset location; Real estate returns; Local real estate risk; Diversification (search for similar items in EconPapers)
JEL-codes: G12 R3 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11146-022-09890-4

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