What Does the Stock Market Tell Us About Real Estate Returns? (Revised: 11-92)

Joseph Gyourko and Donald Keim ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This paper analyzes the risks and returns of different types of real estate-related firms trade on the New York and American stock exchanges (NYSE and AMEX). We investigate the relation of real estate stock portfolio returns with returns on a standard appraisal-based index, and find that lagged values of traded real estate portfolio returns can predict returns on the appraisal-based index. The stock market appears to incorporate information about real estate markets that is later imbedded in property appraisals. Additional analysis suggests that the differences in the return and risk characteristics across different types of traded real estate firms can be explained in part by appealing to real estate market fundamentals relating to the degree of dependence of the real estate firm upon the rental cash flows from existing buildings. These findings highlight the heterogeneity of real estate-related firms and indicate that future work needs to consider other firms in addition to REITs.

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