Greg MacKinnon

REIT Returns and Pricing: The Small Cap Value Stock Factor

This study employs a variance decomposition approach to explore the investment characteristics of equity REITs within a multi‐factor model relating REIT returns to returns to small capitalization value stocks, small cap growth stocks, large cap stocks, bonds and private real estate. It also examines the changing nature of the return process over time, utilizing a finer partition of the stock market factor than many previous researchers have by distinguishing between small capital growth and small capital value stocks. This decomposition allows the effect of small stocks to be measured more accurately. In addition, this study is unique in that it incorporates a real estate factor at the monthly frequency, constructed from monthly REIT share price premium to NAV estimates. Our results show that REITs have a significant small capital value component, yet also exhibit a large sector‐specific component that has increased in importance in recent years. Conversely, REIT return volatility is not highly related to small capital growth stocks, and the contribution of large capital stock drivers to REIT volatility has declined over time. On a monthly level, private real estate returns play only a marginal role in explaining REIT volatility. Our results contribute to an improved understanding of the role played by REITs in portfolios diversified across asset classes.

Are All Open-End Core Funds Created Equal?

Open-end core real estate funds (OECFs) are an important component of the institutional property markets, but have received scant attention in the research literature. Fairchild, MacKinnon, and Rodrigues examine a sample of OECFs to determine if their underlying portfolios are consistent with common definitions of “core” and to what extent core funds provide beta exposure to the market. Generally, OECFs appear to hold core-type portfolios, but this is not universal. In particular, smaller funds tend to be less diversified and have higher idiosyncratic volatility. Many OECFs have a surprisingly large exposure to development projects. The authors find that leverage also plays a key role in an analysis of OECFs. While most OECF returns are driven by the broad market, OECFs are usually an aggressive play on the market, with each fund’s aggressiveness determined by its leverage. Further, although the authors find evidence of persistence in OECF returns, a closer look reveals that this may be due to funds varying their capital structure over time. Overall, while most OECFs appear driven by similar factors, not all are created equal; investors should conduct careful due diligence on their OECF investments, with special attention to fund size and leverage.

Asset sales and takeover threats

Abstract This research addresses the question of whether the existence of a recent takeover threat affects the market reaction to a subsequent sale of assets. The effect of a prior takeover threat on the stock price reaction to an asset sale is examined from the perspective of both the buying firm and the selling firm. The total gains to the transaction are estimated as a market weighted average of the abnormal returns to the two firms. The results show that when there has not been a recent takeover threat on the selling firm, abnormal returns are significantly positive for the seller, the buyer and in total. However, if the selling firm has faced a takeover threat within the previous year, the abnormal returns upon announcement of an asset sale are insignificant for the seller, negative for the buyer, and negative for a portfolio of the two. Hence, the market has a lower estimate of the overall gains in transactions that follow takeover threats on the selling firm; in fact, these transactions result in a net wealth reduction.

Portfolio Strategy and Structure Take Center Stage: "How, What, Where, and When?" Replace "Why?"

Real estate has become more accepted as a basic building block of a well-diversified institutional portfolio over the past decade. The debate around the question “Why Real Estate?” has largely been put to rest. The most relevant research questions about the asset class now revolve around more detailed issues in optimal allocations under different situations and in light of new trends, and also around details of how implementation of a real estate allocation (i.e. the actual investments made) should be done and how it affects the risk/return characteristics of the final portfolio. The relevant new trends in the industry and the associated research questions are discussed.

Are High-Cap-Rate Properties Better Investments?

In this article, the authors explore whether properties with higher cap rates have better investment performance than those with low cap rates. Using market-adjusted cap rates to classify individual properties, they find evidence of a strong value effect in real estate: High-cap-rate properties exhibit higher returns, outperform on a risk-adjusted basis, and should be preferred by investors. The value effect is consistent across property types, persistent over the cycle, statistically significant, and very large in economic terms. Although the underlying dynamics vary somewhat across property types (especially apartments), the better performance of high-cap-rate (i.e., value) properties appears nearly ubiquitous.

New Horizons and Familiar Landscapes:New Capital Sources Confront Shifting Real Estate Fundamentals

Real estate has continued to evolve as an asset class. In this introduction to the special issue, the authors examine new sources of capital that have entered real estate, some of which have already had a large impact and others that have the potential to bring major changes in the future. While the capital market foundations of the asset class are changing, the traditional cycle in property fundamentals remains a distinguishing feature, albeit changed from past cycles. As new sources of capital encounter real estate’s fundamentals cycle, in-depth understanding of the asset class is imperative. The authors review these trends and suggest how the other articles in this special issue can help investors navigate this confluence of new and old.

The Changing Face of Real Estate InvestmentManagement

The real estate investment management industry has been undergoing a process of change over the last two decades. The market is far more transparent than it once was due to the availability of far more, and more detailed, market information. Combined with the increasing integration of real estate with the broader capital markets, this has led to a market that reacts more quickly to events, exhibits more volatility, and in which the nature of risk has changed. These ongoing changes in the market, combined with the lessons of the financial crisis, have resulted in risk management becoming a topic of primary importance in real estate investment. Changes in the nature of real estate risk and the increased emphasis on risk management have the potential to create substantial changes in the real estate investment management industry going forward. The greatest challenge for the industry will be cultural—an understanding of risk, its sources, and its management will need to become central to investment decision making.

The Expansion of Real Estate

The definition of commercial real estate for institutional investment purposes is undergoing a change in two ways. First, real estate is increasingly being absorbed upward into more broadly defined asset buckets, such as real assets or private markets, in which the distinction between real estate and the other asset types is becoming increasingly fuzzy. Second, the asset class is expanding downward to include more specialty property types that were previously not considered suitable for institutional investors. In this article, the authors discuss these trends and their causes and consequences and relate them to the other articles contained in this special real estate issue.

The 4% rule: Does real estate make a difference?

Abstract This paper examines the wealth maximisation and preservation effects of including commercial real estate in retirement-phase portfolio management. Prior research addresses the role of real estate during the wealth-accumulation phase of the investor lifecycle; however, little is known about the contribution of real estate during the invest-and-spend, or decumulation, phase. To address this issue, we estimate short-fall risk based on the widely known 4% Rule. We use pricing data for multiple asset classes and simulation techniques, combined with a robust correlation structure, to examine: short-fall risk sensitivity to alternative spending rules; the impact of public vs. private real estate allocations; wealth preservation as an investment objective; and the effect of real estate on upside, or wealth maximisation, potential. We find short-fall risk in a decumulation portfolio decreases with substantial allocations to real estate. This result holds for a portfolio including either public or private real estate. Additionally, and under most conditions, the best performing decumulation-phase portfolios include a real estate allocation with both public and private real estate exposure. These results have significant implications for investors, whether they be retirees, plan administrators or endowments, as well as financial economists studying the lifecycle of investment decisions.