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A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics

  • John Cotter

    (School of Business, University College Dublin)

  • Richard Roll

    (UCLA)

Real Estate Investment Trusts (REITs) are the only truly liquid assets related to real estate investments. We study the behavior of U.S. REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about .65. Decomposing their covariances into principal components reveals several strong factors. REIT characteristics differ to some extent from those of the S&P/Case-Shiller (SCS) residential real estate indexes. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in real estate is far more risky than what might be inferred from the widely-followed SCS series.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201008.pdf
File Function: First version, 2010
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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201008.

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Length: 28 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:ucd:wpaper:201008
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  1. Joseph Gyourko & Edward Nelling, 1996. "Systematic Risk and Diversification in the Equity REIT Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 493-515.
  2. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
  3. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  4. Cotter, JOhn & Dowd, Kevin, 2006. "Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements," MPRA Paper 3505, University Library of Munich, Germany.
  5. Chan, Su Han & Erickson, John & Wang, Ko, 2002. "Real Estate Investment Trusts: Structure: Structure, Performance, and Investment Opportunities," OUP Catalogue, Oxford University Press, number 9780195155341, March.
  6. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  7. Colin Lizieri & Stephen Satchell & Qi Zhang, 2007. "The Underlying Return-Generating Factors for REIT Returns: An Application of Independent Component Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 569-598, December.
  8. John Cotter & Simon Stevenson, 2008. "Modeling Long Memory in REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 533-554, 09.
  9. 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.
  10. 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.
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