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What Factors Determine International Real Estate Security Returns?

  • Foort HAMELINK

    (Lombard Odier & Cie, Vrije Universiteit and FAME)

  • Martin HOESLI

    (HEC-University of Geneva, FAME and University of Aberdeen)

We use constrained cross-section regressions to disentangle the effects of various factors on international real estate security returns. Besides a common factor, pure country, property type, size, and value/growth factors are considered. The value/growth measure that is used in this paper provides for each security the relative importance of the value and growth components, rather than a binary classification. The value/growth factor is found to be volatile and to have a substantial effect on returns over the analyzed period February 1990-April 2003. Country factors are the dominant factors, and size is shown to have a negative impact on returns. Statistical factors derived by means of cluster analysis explain about one third of specific returns on international real estate securities. The implication for portfolio managers is that failing to recognize the importance of the various factors leads to the portfolio being exposed to systematic risk.

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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp50.

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Date of creation: Jul 2003
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Handle: RePEc:fam:rpseri:rp50
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  1. Graeme Newell & James R. Webb, 1996. "Assessing Risk for International Real Estate Investments," Journal of Real Estate Research, American Real Estate Society, vol. 11(2), pages 103-116.
  2. Ling, David C & Naranjo, Andy, 2002. "Commercial Real Estate Return Performance: A Cross-Country Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 119-42, Jan.-Marc.
  3. Terence Khoo & David Hartzell & Martin Hoesli, 1993. "An Investigation of the Change in Real Estate Investment Trust Betas," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(2), pages 107-130.
  4. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  5. Piet M.A. Eichholtz, 1996. "The Stability of the Covariances of International Property Share Returns," Journal of Real Estate Research, American Real Estate Society, vol. 11(2), pages 149-158.
  6. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  7. Crocker H. Liu & Jianping Mei, 1998. "The Predictability of International Real Estate Markets, Exchange Rate Risks and Diversification Consequences," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(1), pages 3-39.
  8. Piet Eichholtz & Ronald Huisman & Kees Koedijk & Lisa Schuin, 1998. "Continental Factors in International Real Estate Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 493-509.
  9. Youguo Liang & Arjun Chatrath & Willard McIntosh, 1996. "Apartment REITs and Apartment Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 11(3), pages 277-290.
  10. Alan J. Ziobrowski & Brigitte J. Ziobrowski & Sidney Rosenberg, 1997. "Currency Swaps and International Real Estate Investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(2), pages 223-251.
  11. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
  12. Simon Stevenson, 2000. "International Real Estate Diversification: Empirical Tests using Hedged Indices," Journal of Real Estate Research, American Real Estate Society, vol. 19(1), pages 105-131.
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