David Hartzell

The Integration of the Real Estate Market and the Stock Market: Some Preliminary Evidence

The current study investigates whether the commercial real estate market is segmented from the stock market using the framework of Jorion and Schwartz (1986). Evidence is found to support the hypothesis that segmentation does exist as the result of indirect barriers such as the cost, amount, and quality of information for real estate rather than legal constraints. However, this evidence is contingent on whether real estate returns are computed with appraised values or imputed sale prices and on which market proxy is chosen.

International Evidence on Real Estate Securities as an Inflation Hedge

The current study investigates whether real estate securities continue to act as a perverse inflation hedge in foreign countries given security design differences. Both a stationary and a nonstationary risk free rate are alternatively used in conjunction with the methodology of Fama and Schwert (1977) and also the methodology of Geske and Roll (1983) to investigate this question. Real estate securities provide a worse hedge against inflation relative to common stocks in some countries and are comparable to stocks in other countries. Also, evidence supports the reverse causality model of Geske-Roll.

Property shares, appraisals and the stock market: An international perspective

A severe problem facing both real estate researchers and investors is the lack of reliable real estate returns data. Property shares, the shares of companies which invest in property and manage a portfolio of real estate, have been proposed as indicators of real estate performance. Property shares exist in many countries, are publicly traded, and their returns are not inherently biased. For three countries, we investigate the relationships with common stock and appraisal-based returns which property share returns exhibit. Our results indicate that property shares are closely related to the stock markets on which they trade, thereby confirming previous findings for the United States. However, property share returns also predict appraisal-based indices.

An Investigation of the Change in Real Estate Investment Trust Betas

The betas on equity real estate investment trusts (EREITs) have undergone a structural shift in the past 20 years. We show that this is the result of the lower variability of EREIT returns and argue that the decrease in the standard deviation of EREIT returns can be attributed to the increasing levels of information about EREITs. We find that the number of analysts following the EREITs industry, as measured by IBES, can significantly explain the drop in the standard deviation for most EREITs. This was also found to be the case for another proxy for the level of information—the trading volume of the EREIT index.

The Composition of the Market Portfolio and Real Estate Investment Performance

This study investigates whether the composition of the market portfolio leads to different inferences on real estate performance. As a point of departure, this paper first explores whether the omission of assets in a market proxy leads to a biased measurement of investment performance. The study finds that ranking investment performance is not meaningless even though investment performance is inaccurately measured. Furthermore, the composition of the market proxy does not necessarily lead to different inferences on real estate investment performance although superior real estate investment performance arises from the omitted asset phenomenon and also from smoothing bias in general.

Economic diversification in European real estate portfolios

Summary Real estate has an accepted role as a diversification instrument in mixed‐asset portfolios. To diversify within the real estate portfolio is the next step. However, due to lack of data, it is not clear exactly how to diversify. Regional employment characteristics are used here to get an insight into economic diversification possibilities in European real estate portfolios. A modified chi‐square technique was applied to employment shares in 74 European regions. Regions with a common specialization were found to be scattered. This implies that regionally diverse investments are not necessarily economically diverse. Also, many regions were found to be internally diverse.

The role of co-skewness in the pricing of real estate

The current study investigates whether systematic skewness offers an alternative perspective as to why the risk-adjusted returns on real estate should be similar to that for stocks. This is not a trivial issue since an affirmative finding implies that we might be incorrectly measuring real estate risk from both a pricing and a portfolio allocation perspective. A multivariate test of the Kraus-Litzenberger model is used to investigate this skewness proposition with the K-L CAPM tested against several alternative versions of the CAPM. The study finds that the Kraus-Litzenberger model offers additional insights into the measurement of real estate risk. Evidence is also found that both the zero beta and the consumption-oriented CAPM hold, which is consistent with the recent literature in real estate.

A transactions‐based real estate index: Is it possible?

Summary This paper examines both practically and statistically the possibility of creating a transactions‐based real estate price index similar to the well‐known stock and bond indices. While the necessary methodology is available, differences in the real estate asset (and hence in the markets in which it trades) are shown to prohibit the development of such an index even under ‘ideal’ circumstances. First, in an informationally inefficient market, it is not in the best interest of most decision‐makers to engage in the kind of complete disclosure needed to produce an accurate index. Second, even with complete disclosure, the number of transactions needed statistically to adjust for property differences substantially exceeds the number of quarterly transactions in most markets. While the empirical work supporting these conclusions is based on US data, the authors believe that similar constraints exist in most of the worlds major markets and that investment professionals will be forced to work with less th...

Why Do REIT Prices Change? The Information Content of Barron's "The Ground Floor."

This article examines the information content in a series of market commentaries covering the publicly traded real estate market. The data are constructed from REIT-specific announcements published in a widely disseminated source of market commentary. The empirical methodology is designed to test whether the unexpected price change and unexpected volume are significant on the announcement day. The results demonstrate that the market commentaries provide information that impacts prices and that investors use this information in their trading. Additional analysis suggests that prices change more in the period following the REIT boom than during an earlier period. This result seems somewhat puzzling given recent studies that report an increase in REIT market liquidity.

Alternative Rationales for Superior Real Estate Investment Performance: An Empirical Reinterpretation of Prior Research

Summary The purpose of this study is to re‐evaluate the existing research on superior real estate investment performance and to suggest alternative explanations for previous findings. A portion of this analysis draws on data from the empirical studies reviewed to the extent possible with appraisal data as well as transaction data based on properties sold by the National Council of Real Estate Investment Fiduciaries (NCREIF) members used for studies which do not report their data. Evidence is presented which links superior real estate investment performance to positive excess skewness in the return distribution. The study also shows that there is a greater likelihood that the return distributions having positive excess skewness are associated with returns computed on the basis of appraised values as opposed to transaction prices. In addition to this, the study finds that inflation and the omission of assets from the market proxy also accounts in part for superior real estate investment performance.