Convergence dynamics in international real estate securities markets

In this paper, we adopt the concepts of risk-return convergence and beta-convergence to measure and evaluate securitized real estate market integration for 16 FTSE-NAREIT-EPRA developed markets from North America, Europe and Asia-Pacific from November 1990 to December 2011. As securitized real estate market continues to expand in size, it represents an increasingly significant but not yet well-understood segment of the financial system in the global economy. We define real estate securities market integration to indicate convergence of returns and risks of the markets in different national economies. Specifically, the risk-return convergence concept is an extension of the sigma-convergence concept in the economic growth literature since sigma-convergence is unable to simultaneously evaluate the risk and return attributes of the data. In addition, beta convergence measures the speed of integration. If the marketsí risk-return characteristics are found to ìconvergeî significantly towards each other over time, then they have become more similar to each other in terms of risk and return performances. Moreover, if the risk-return convergence is accompanied by beta-convergence, it would imply that the securitized real estate markets are moving faster towards integration and consequently there is diminished long-run diversification opportunity in international real estate investing. Conversely, if the securitized real estate markets are found to have diverging risk-return characteristics over time, as well as accompanied by lower speed of convergence, then the gains from international real estate securities portfolio diversification should still remain attractive. Finally, we examine the empirical relationship between international correlation change and risk-return convergence to evaluate whether increasing correlation necessarily implies risk-return convergence.