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From Property Companies to Real Estate Investment Trusts: The Impact of Economic and Property Factors on UK Listed Property Returns

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  • Vitor Leone

Abstract

A great deal of research has examined comovements between commercial real estate returns and macroeconomic variables in the US economy. These relationships have attracted less research interest for the UK real estate market, despite this being the largest European Market. This study targets this gap in the literature by investigating the impact of economic and property factors ? e.g. the UK IPD all property returns, the FTSE all share index returns, and the term structure of interest rates ? on listed property returns. It examines a sample of UK property companies which converted to real estate investment trusts (REITS) following the introduction of the UK legislation permitting this from January 2007. By applying structural time-series modelling and the Kalman filter to obtain unexpected changes or innovations in selected economic and property variables it was found that economic and property variables influence commercial property returns in the UK. Specifically, unexpected changes in the FTSE All Share Index returns, the UK IPD All Property Returns, Industrial Production, the UK IPD All Property Rental Growth, and the UK All Property Equivalent Yield all had a positive impact on property returns. In contrast the term structure of interest rates and the sterling US dollar exchange rate exerted a negative influence. It was also found that by converting property companies into REITS their returns quickly acquired common features of both equities and commercial property backed assets.

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Bibliographic Info

Article provided by Economic Issues in its journal Economic Issues.

Volume (Year): 16 (2011)
Issue (Month): 1 (March)
Pages: 19-36

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Handle: RePEc:eis:articl:111bleone

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  1. Ling, David C & Naranjo, Andy, 1997. "Economic Risk Factors and Commercial Real Estate Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 283-307, May.
  2. Su-Jane Chen & Chengho Hsieh & Timothy W. Vines & Shur-Nuaan Chiou, 1998. "Macroeconomic Variables, Firm-Specific Variables and Returns to REITs," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 269-278.
  3. Vitor Leone & Lawrence A. Leger, 2007. "Generating Innovations in Economic Variables," Discussion Paper Series 2007_19, Department of Economics, Loughborough University, revised Jul 2007.
  4. K. C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 431-452.
  5. Cuthbertson, Keith, 1988. "Expectations, Learning and the Kalman Filter," The Manchester School of Economic & Social Studies, University of Manchester, vol. 56(3), pages 223-46, September.
  6. Tien Foo Sing, 2004. "Common risk factors and risk premia in direct and securitized real estate markets," Journal of Property Research, Taylor & Francis Journals, vol. 21(3), pages 189-207, December.
  7. James Payne, 2003. "Shocks to macroeconomic state variables and the risk premium of REITs," Applied Economics Letters, Taylor & Francis Journals, vol. 10(11), pages 671-677.
  8. Ewing, Bradley T. & Payne, James E., 2005. "The response of real estate investment trust returns to macroeconomic shocks," Journal of Business Research, Elsevier, vol. 58(3), pages 293-300, March.
  9. Su-Jane Chen & Cheng-Ho Hsieh & Bradford D. Jordan, 1997. "Real Estate and the Arbitrage Pricing Theory: Macrovariables vs. Derived Factors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 506-523.
  10. Lizieri, Colin & Satchell, Stephen, 1997. "Interactions between Property and Equity Markets: An Investigation of Linkages in the United Kingdom 1972-1992," The Journal of Real Estate Finance and Economics, Springer, vol. 15(1), pages 11-26, July.
  11. Leger, Lawrence & Leone, Vitor, 2008. "Changes in the risk structure of stock returns: Consumer Confidence and the dotcom bubble," Review of Financial Economics, Elsevier, vol. 17(3), pages 228-244, August.
  12. Thomas E. McCue & John L. Kling, 1994. "Real Estate Returns and the Macroeconomy: Some Empirical Evidence from Real Estate Investment Trust," Journal of Real Estate Research, American Real Estate Society, vol. 9(3), pages 277-288.
  13. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
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