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Commercial Real Estate Return Distributions: A Review Of Literature And Empirical Evidence

  • Colin Lizieri

    ()

    (Department of Real Estate & Planning, University of Reading School of Business)

  • Charles Ward

    ()

    (Department of Real Estate & Planning, University of Reading School of Business)

This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

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Paper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2000-01.

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Length: 37 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:rdg:repxwp:rep-wp2000-01
Contact details of provider: Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
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Web page: http://www.henley.reading.ac.uk/

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  1. James K. Maitland-Smith & Chris Brooks, 1999. "Threshold autoregressive and Markov switching models: an application to commercial real estate," Journal of Property Research, Taylor & Francis Journals, vol. 16(1), pages 1-19, January.
  2. David Hartzell & John Hekman & Mike Miles, 1986. "Diversification Categories in Investment Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(2), pages 230-254.
  3. Edward Nelling & Joseph Gyourko, 1998. "The Predictability of Equity REIT Returns," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 251-268.
  4. Fisher, Jeffrey D & Geltner, David M & Webb, R Brian, 1994. "Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods," The Journal of Real Estate Finance and Economics, Springer, vol. 9(2), pages 137-64, September.
  5. Mike Miles & Tom McCue, 1984. "Commercial Real Estate Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 355-377.
  6. Quan, Daniel C & Quigley, John M, 1991. "Price Formation and the Appraisal Function in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 127-46, June.
  7. Joseph Gyourko & Donald B. Keim, 1992. "What Does the Stock Market Tell Us About Real Estate Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 457-485.
  8. Geltner, David Michael, 1991. "Smoothing in Appraisal-Based Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 4(3), pages 327-45, September.
  9. John Okunev & Pat Wilson, 1995. "Using Non-Linear Tests to Examine Integration Between Real Estate and Equity Markets," Working Paper Series 47, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  10. F.C. Neil Myer & James R. Webb, 1993. "Return Properties of Equity REITs, Common Stocks, and Commercial Real Estate: A Comparison," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 87-106.
  11. Wiggins, James B, 1991. "Empirical Tests of the Bias and Efficiency of the Extreme-Value Variance Estimator for Common Stocks," The Journal of Business, University of Chicago Press, vol. 64(3), pages 417-32, July.
  12. Daniel C. Quan & Sheridan Titman, 1999. "Do Real Estate Prices and Stock Prices Move Together? An International Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 183-207.
  13. Conlin Lizieri & Steven Satchell & Elaine Worzala & Roberto Dacco', 1998. "Real Interest Regimes and Real Estate Performance: A Comparison of UK and US Markets," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 339-356.
  14. Myer, F C Neil & Webb, James R, 1994. "Statistical Properties of Returns: Financial Assets versus Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 8(3), pages 267-82, May.
  15. Young, Michael S & Graff, Richard A, 1995. "Real Estate Is Not Normal: A Fresh Look at Real Estate Return Distributions," The Journal of Real Estate Finance and Economics, Springer, vol. 10(3), pages 225-59, May.
  16. Graham Newell & Maurice Peat & Max Stevenson, 1996. "Testing for Evidence of Nonlinear Structure in Australian Real Estate Market Returns," Working Paper Series 61, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  17. Tsong-Yue Lai & Ko Wang, 1998. "Appraisal Smoothing: The Other Side of the Story," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 511-535.
  18. David M. Geltner, 1993. "Estimating Market Values from Appraised Values without Assuming an Efficient Market," Journal of Real Estate Research, American Real Estate Society, vol. 8(3), pages 325-346.
  19. Colin Lizieri & Stephen Satchell, 1997. "Property company performance and real interest rates: a regime-switching approach," Journal of Property Research, Taylor & Francis Journals, vol. 14(2), pages 85-97, January.
  20. Lizieri, Colin & Satchell, Stephen, 1997. "Interactions between Property and Equity Markets: An Investigation of Linkages in the United Kingdom 1972-1992," The Journal of Real Estate Finance and Economics, Springer, vol. 15(1), pages 11-26, July.
  21. Daniel C. Quan & John M. Quigley, 1989. "Inferring an Investment Return Series for Real Estate from Observations on Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 218-230.
  22. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 175-90, June.
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