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Are REITs Real Estate? Evidence from International Sector Level Data

Martin Hoesli and Elias Oikarinen

No 12-15, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The aim of this study is to examine whether securitized real estate returns reflect direct real estate returns or general stock market returns using international data for the U.S., U.K., and Australia. In contrast to previous research, which has generally relied on overall real estate market indices and neglected the potential long-term dynamics, our econometric evaluation is based on sector level data and caters for both the short-term and long-term dynamics of the assets as well as for the lack of leverage in the direct real estate indices. In addition to the real estate and stock market indices, the analysis includes a number of fundamental variables that are expected to influence real estate and stock returns significantly. We estimate vector error-correction models and investigate the forecast error variance decompositions and impulse responses of the assets. Both the variance decompositions and impulse responses suggest that the long-run REIT market performance is much more closely related to the direct real estate market than to the general stock market. Consequently, REITs and direct real estate should be relatively good substitutes in a long-horizon investment portfolio. The results are of relevance regarding the relationship between public and private markets in general, as the ‘duality’ of the real estate markets offers an opportunity to test whether and how closely securitized asset returns reflect the performance of underlying private assets. The study also includes implications concerning the recent financial crisis.

Keywords: Public and Private Real Estate; REITs; Property Type; Dynamics; Leverage; Fundamentals; VECM (search for similar items in EconPapers)
JEL-codes: G11 G12 G01 R33 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ure
Date: 2012-03
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Journal Article: Are REITs real estate? Evidence from international sector level data (2012) Downloads
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