David C. Ling and Andy Naranjo*
*Department of Finance, Insurance, and Real Estate Warrington College of Business University of Florida Gainesville, FL 32611-7168 Phone: (352) 392-0153 Fax: (352) 392-0301
March 2000 Latest Revision: December 2000
We thank Piet Eichholtz, Pat Hendershott, Charles Ward, two anonymous referees, and participants at the Maastricht-Cambridge Property Investment Symposium for valuable comments and suggestions. We also thank Elvan Aktas for valuable research assistance and Piet Eichholtz and Han Op 't Veld of Global Property Research for assistance with the data. Additionally, we thank the Real Estate Research Institute for providing funding support for this project.
Commercial Real Estate Return Performance: A Cross-Country Analysis
Abstract This paper investigates the return performance of publicly traded real estate companies. The analysis spans the 1984 to 1999 time period and includes return data on over 600 companies in 28 countries. The return data reveal a substantial amount of variation in mean real estate returns and standard deviations across countries. Moreover, standard Treynor ratios, which scale country excess returns by the estimated βeta on the world wealth portfolio, also reveal substantial variation across countries in excess real estate returns per unit of systematic risk. However, when we estimate Jensen’s alphas using both single and multifactor specifications, we detect little evidence of abnormal, risk-adjusted returns at the country level. We do, however, find evidence of a strong world-wide factor in international real estate returns. Furthermore, even after controlling for the effects of world-wide systematic risk, an orthogonalized country-specific factor is highly significant. This suggests that real estate securities may provide international diversification opportunities.
Commercial Real Estate Return Performance: A Cross-Country Analysis 1. Introduction A global real estate securities market has slowly developed over the last two decades. At year-end 1999, the market value of publicly traded real estate companies was approaching $400 billion. This public market provides a vehicle for investors to construct international commercial real estate portfolios without the burden of acquiring, managing, and disposing of direct property investments in far-away countries with unfamiliar legal, political, and market structures.1 However, to sustain and increase the flow of investment capital into the international real estate securities market, performance benchmarks and relative performance measurement are vital. This paper investigates the return performance of publicly traded real estate companies. The analysis spans the 1984 to 1999 time period and includes return data on over 600 companies in 28 countries. At the simplest level, performance analysis consists of comparing historical returns and their variances. However, a key problem with this simple unconditional approach is that it does not explicitly consider the risks associated with the returns. In order to obtain more accurate risk-return characteristics, and to examine why a specific performance level occurred, more precise estimates of risk are needed. To date, the most widely used approach to risk adjustment has been the use of single-βeta models such as the capital asset pricing model (CAPM).2 Although the single-βeta approach is a positive first step toward controlling for systematic sources of return variation when assessing return performance, there is a growing consensus that single-βeta models provide an inadequate description of security pricing. For 1
See Eichholtz and Koedijk (1996) for a detailed discussion of the evolution and importance of international real estate securities markets. See, for example, Glascock (1991), Glascock and Hughes (1995), Gyourko and Kiem (1992), Hartzell and Mengden (1987),...