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On Indexing Commercial Real Estate Properties and Portfolios

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  • Walter Boudry
  • N. Coulson
  • Jarl Kallberg
  • Crocker Liu

Abstract

Commercial real estate indices play an important role in performance evaluation and overall investment strategy. However, the issue of how representative they are of the returns on portfolios of commercial properties is an open issue. Our study addresses this topic by analyzing a sample of 12,427 repeat sales transactions between Q4 2000 and Q2 2011. We find that the aggregate real estate indices (Moody’s REAL CPPI) do a good job of tracking real returns when portfolios of more than 20 properties are considered. At this level, tracking is somewhat less effective than our benchmark of the S&P500 and its component stocks. Compared to the average root mean squared deviation (RMSD) from one asset, randomly selected portfolios with 20 assets reduce the RMSD by 75 % for the S&P500 compared to 66 % for the aggregate index. These results suggest that the aggregate indices can be effective in hedging and evaluating the performance of direct real estate investment. We further find that tracking at the property type level provides little benefit over using an aggregate index. However, indexing using a property type and location matched index provides lower tracking error for any level of diversification. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Walter Boudry & N. Coulson & Jarl Kallberg & Crocker Liu, 2013. "On Indexing Commercial Real Estate Properties and Portfolios," The Journal of Real Estate Finance and Economics, Springer, vol. 47(4), pages 617-639, November.
    • Handle: RePEc:kap:jrefec:v:47:y:2013:i:4:p:617-639
    DOI: 10.1007/s11146-013-9427-y
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