The Relationship between Private and Listed Office Investments

This paper examines the relationships between private and listed real estate performance in a novel manner, using international data for one single real estate sector, offices. The fact that property companies are nearly fully invested in real estate should result in a high correlation between their returns and the development of the underlying property markets. We test this proposition across countries and over time. The issue whether publicly listed real estate performance coincides with the behaviour of the underlying private real estate markets has been at the heart of the real estate literature for several decades. We will add to this literature by extending the scope internationally, while concentrating on one single sub-sector based on quarterly data over the years 1984-2006. By the end of 2006 no less than 108 real estate investment firms specialized in office real estate were traded publicly at Stock Exchanges around the globe. These firms offer us the opportunity to isolate the relationship between their stock performance and the returns that were yielded on the office markets they invested in. Previous studies have analyzed the relationship between direct and indirect real estate investments on an aggregated level, which might distort the relationships due to differences in market allocations across the sub-sectors. Given concerns related to the available data in empirical research we apply various statistical filtering techniques to correct for the effects of smoothing, leverage, and stock market sentiments on a unique data sample that covers office markets from three different continents.