Mike Miles

Diversification Categories in Investment Real Estate

This paper continues previous work evaluating the benefits of diversification and analyzes the various dimensions within the commercial real estate opportunity set. The database is large and extends through the 1982 downturn in property values. Due to the low levels of systematic risk, current distinctions by region and property type make little sense in a world of costly diversification. More exacting categories combining property type, SMSA growth rate and lease maturity offer promise for more efficient diversification within the real estate portfolio.

Real Estate Returns and Inflation

The ability of assets to protect an investor from purchasing power risk due to inflation has received a good deal of attention in the literature recently. The focus of much of this research has been on the properties of common stocks as inflation hedges. Bodie [1976] finds that the real return on equity is negatively related to both anticipated and unanticipated inflation; a similar result is obtained by Fama and Schwert [1977]. Bernard and Frecka [1983] examine individual common stock returns and find that the majority exhibit this negative relationship. This paper uses similar logic to examine the ability of a well-diversified portfolio of real estate to hedge against anticipated and unanticipated inflation. Copyright American Real Estate and Urban Economics Association.

Historic Returns and Institutional Real Estate Portfolios

This study employs a sample of equity REIT portfolios from 1972-78 to investigate various aspects of real estate returns. Return estimates are derived for the unlevered cash yields by property size, type and location. Based on these data, the effects of certain kinds of diversification on risk-adjusted returns are examined. Finally, historic REIT portfolios are compared to current commingled fund portfolios and suggestions made concerning the benefits of restructuring. Copyright American Real Estate and Urban Economics Association.

Commercial Real Estate Returns

In the commercial real estate market, which is perceived to be relatively inefficient, investors have comparative advantages; hence there are significant costs to diversification. This paper presents for the first time a series of market (or quasi-market) returns for a large data base. This data base is believed to be the most complete commercial real estate data base yet constructed. The paper empirically evaluates the benefits of diversification along various dimensions within the commercial real estate opportunity set. The analysis confirms certain aspects of prior work concerning inflation protection and diversification opportunities while concluding that even investment grade real estate investments are heterogeneous assets. Copyright American Real Estate and Urban Economics Association.

Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?

A transactions-driven commercial real estate return series is generated in this study to determine whether the reliance on appraised values in the estimation of real estate returns is the source of the reported underpricing of real estate relative to stocks, bonds, and bills when analyzed in a traditional mean-variance setting. The reported underpricing of commercial real estate would be rational if transactions-driven returns exhibit more variance than appraisal-driven returns. While we find that transactions-driven real estate returns have greater variance than appraisal-driven returns for individual properties, most of the individual property risk is idiosyncratic and diversified away at the portfolio level. Real estate continues to be a dominate asset class in mean-variance allocation models even when represented with transactions-driven indices.-super-1 Copyright American Real Estate and Urban Economics Association.

The Motivation for Institutional Real Estate Sales and Implications for Asset Class Returns

Since real estate assets are sold infrequently, analyses that use samples of exclusively sold properties to estimate pricing models may be seriously in error. This paper uses data on samples of sold and unsold properties and an appropriate statistical methodology to evaluate the extent of this bias. The results clearly show that it is important to control for sales motivations and that pricing equations that ignore this source of bias may be misleading. Copyright American Real Estate and Urban Economics Association.

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...

Risk analysis in the real property development process: a conceptual framework and a computer simulation model

Abstract Real property development is an interdisciplinary field that produces interesting time-risk questions for the various participants. The conceptual framework of the process is a normative staging of activities and related decision points. The framework provides the theoretical foundation for the application of management science techniques to this complex environment. The computer simulation model is a straightforward quantification of the conceptual framework. The equations incorporated in the model are common to financial and appraisal literature with alterations designed to encompass the unique aspects of the real property development process. The model is a tool for use in the application of sensitivity analysis to development period decision making. At various decision points in the process the decision maker can evaluate alternative risk control techniques on a cost-benefit basis using the model.