Indirect Real Estate Investments And Their Links With Properties, Common Stocks And The Macroeconomy - Evidence From The Uk And Us Markets

Investments in listed real estate imply that the progress on the underlying property markets no longer represents the only driver of the risk/return structure of this asset. Instead, listed companies are faced with the risk that market values are predominantly driven by developments on general stock markets, although the main business of the constituents remains unchanged and is still focused on trading and renting real estate properties. For that reason, it is worthwhile considering to what extent developments on general stock markets influence the progress of listed real estate. Answering this question is of particular importance with respect to issues of asset allocation in a multi-asset portfolio. If predominantly driven by progress on general stock markets, the benefits of listed real estate in terms of portfolio diversification would be considerably limited, because this scenario ultimately results in a portfolio allocation which is riskier than requested. Using a vector error correction framework and variance decompositions, the analysis of the UK and US property markets consistently detects a significantly stronger linkage among real estate assets compared to the linkage among the examined equity assets. The real estate equity markets are therefore predominantly driven by the progress of the underlying properties, which can therefore still be interpreted as the key driver of listed real estate in the long run. Long-term investments in listed real estate therefore not only provide opportunities for portfolio diversification, but additionally allow the combination of advantages of both real estate assets, including benefits in terms of liquidity, transparency and management. As a result, investments in real estate equities can still be classified as an alternative investment and therefore still represent a favourable tool in terms of asset allocation.