A time-varying analysis of abnormal performance of UK property companies

George Matysiak and Gerald Brown

Applied Financial Economics, 1997, vol. 7, issue 4, 367-377

Abstract: The investment selection ability of property company managers is investigated. The specialized nature of commercial property portfolio holdings presents the opportunity for added value and, therefore, for abnormal performance. It is argued that property company share investment performance should be undertaken using time-varying abnormal performance measures; in particular, a time-varying measure of Jenen's excess performance. Furthermore, because of the changing structure of both the composition of the underlying property portfolios held by property companies and the levels of gearing, the analytical framework should also employ a time-varying beta measure. Over the period of analysis, 1980-1995, the majority of property companies analysed exhibited an enduring risk-adjusted underperformance profile, although this was not found to be statistically distinguishable from zero. For the few companies delivering a positive abnormal performance it did not prove statistically significant. The implication is that the total returns delivered by property companies are not significantly different from a random buy-and-hold strategy. This may be indicative of the indifferent performance of the underlying direct property portfolio holdings, with the implication that property company managers have not demonstrated any property selection skills by exploiting their specialist knowledge in identifying underpriced investment opportunities. If property selection ability does exist in the direct commercial property market then, in the main, it is not reflected in risk-adjusted outperformance in property company share prices. If investors believe there are inefficiencies in the direct commercial property market, and therefore opportunities for outperformance, it does not appear to be possible to exploit such inefficiencies indirectly by investing in property company shares.

Date: 1997
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DOI: 10.1080/096031097333484

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