Identifying Switching Signals Across the Four Quadrants of Real Estate: A United Kingdom Case Study

Purpose - The purpose of this paper is to identify and quantify the importance of the major market factors driving the relative risk and returns across all four real estate quadrants (public/ private, debt/ equity) in the UK over the period 1992-2012, and to identify the pricing signals for investors to alter portfolio weightings across the four sectors at different points in the cycle. Design/methodology/approach - For consistency we have taken the IPD All Property Index as a proxy for the returns available in the direct market. This represents the base case ungeared returns available. We have then replicated each of the four quadrants as follows: 1) Listed real estate – we have geared the direct real estate returns using the actual LTV ratios throughout the period of a leading UK company, and replicated the impact of a listed valuation by applying the EPRA discount /premium to NAV to the underlying NAV changes. This allows us to decompose returns into separate gearing and valuation impacts. 2) Listed debt – we have used the return and volatility series of listed real estate bonds available throughout the period 3) Unlisted real estate . We have looked at the IPD Index, AREF leverage ratios and secondary market pricing to replicate these returns, and 4) Unlisted debt – we have modelled these returns using available data and assumptions regarding fees, LTVs and delinquency rates.Findings - We aim to show, using the listed sector as a leading indicator, the pricing signals to switch portfolio weights through the cycle using all four quadrants available to investors. Originality/value - We believe that there is a lack of literature on this topic, in particular focussing on the interdependence and relationships between the four quadrants. By using a consistent measure for direct market returns and then constructing the risk and return for all quadrants rather than using disparate indices we believe we provide a more consistent methodology for evaluating the risk and return characteristics than has hitherto been undertaken.