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Indirect Real Estate Investments and their Links with
Properties, Common Stocks and the Macroeconomy
Alexander Schätz
European Real Estate Society Conference 2010 in Milano, June 23-26, 2010
Approach
1. Conventional Approach


US Model:
UK Model:
NAREIT Equity REIT Index, NCREIF Property Index, S&P 500
FTSE 350 Real Estate Index, IPD, FTSE 100
2. Real Estate Investments and the Macroeconomy


Direct Real Estate Investments
Indirect Real Estate Investments
3. Macroeconomic Approach





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3 Assets (Direct RE Investment, General Stocks, Indirect RE Investments)
GDP
CPI
Short-Term Interest Rates
Long-Term Interest Rates / Mortgage Rates
Sample Selection and Structural Breaks
Results for the US and UK Markets
Conventional
Macroeconomic
3 Assets
CPI, GDP, LongTerm Rates
(10y)
CPI, GDP, ShortTerm Rates (3m)
Approach
CPI, GDP
Q1 1978 – Q3 2009
Instable
Dubious signs
Instable
Dubious signs
Instable
Dubious signs
Instable
Dubious signs
Q1 1978 – Q2 2008
Instable
Dubious signs
Instable
Dubious signs
Instable
Dubious signs
Instable
Dubious signs
Q1 1992 – Q2 2008
Stable
Stable
Stable
Stable
Q1 1992 – Q3 2009
Stable
Stable
Stable
Stable
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Conventional Approach
VECM (β – vectors) and Variance Decomposition
Sample: Q1 1992 – Q3 2009
Variance Decomposition of NAREIT
%
Variance Decomposition of RESTOCK
% 100
80
70
80
60
50
60
40
40
30
20
20
10
0
2
4
6
8
NAREIT
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10
12
NCREIF
14
16
SP500
18
20
Time
0
2
4
6
8
RESTOCK
10
12
IPD
14
16
FTSE
18
20
Time
Real Estate and the Macroeconomy
VECM (β – vectors)
Sample: Q1 1992 – Q3 2009
Indirect Investment
Direct Investment
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Macroeconomic Approach
VECM (β – vectors)
Sample: Q1 1992 – Q3 2009
Macroeconomic Approach including Short-Term Interest Rates
2
Seite 6
Macroeconomic Approach
Variance-Decomposition
United States
United Kingdom
Variance Decomposition of NAREIT
% 60
Variance Decomposition of RESTOCK
%
70
60
50
50
40
40
30
30
20
20
10
10
0
0
2
4
6
8
NCREIF
INTER
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10
12
NAREIT
GDP
14
16
CPI
SP500
18
20 Time
2
4
6
IPD
INTER
8
10
12
RESTOCK
GDP
14
16
CPI
FTSE
18
20 Time
Empirical Results: VECM (β – vectors)
Sample: Q1 1992 – Q3 2009
Macroeconomic Approach including Long-Term Interest Rates
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Empirical Results: VECM (β – vectors)
United States
United Kingdom
Variance Decomposition of NAREIT
%
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
2
4
6
8
NCREIF
LTRATES
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Variance Decomposition of RESTOCK
%
10
12
NAREIT
GDP
14
16
18
CPI
SP500
20 Time
2
4
6
IPD
INTER
8
10
12
RESTOCK
GDP
14
16
CPI
FTSE
18
20
Time
Summary
1. The conventional approach indicates a stronger impact of direct
real estate in the long run.
2. Direct and indirect real estate investments are driven by exactly the
same macroeconomic factors.
3. The macroeconomic approach indicates a stronger impact of direct
real estate in the long run.
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Thank you for your attention!
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3. Literature: “Features of Real Estate Assets“
Author (Year)
Method
Ling and Naranjo (1999)
Multifactor Asset
Pricing Model (MAP)
Real Estate Economics
Findings
•Exchange-traded real estate and equity markets are
integrated
•Degree of integration increased during the 1990s
Glascock et al. (2000)
Journal of Real Estate Finance and
Economics
Cointegration
•REITs are rather comparable with stocks than bonds
CAPM
•Substantial variation in mean returns and standard
deviations across the examined countries
Bond et al. (2003)
Real Estate Economics
Hamelink and Hoesli (2004)
Real Estate Economics
Westerheide (2006)
ZEW Working Paper
Cross-sectional
regressions
•Dominant role of country factors
Engle Granger Test,
ECM, Johansen
Procedure
•In the long run: Real estate equities reflect the direct
real estate; (weak) hedge against inflation
Morawski et al. (2008)
Financial Markets and Portfolio
Management
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Johansen Procedure
•Relevance of size factors and value/growth factors
•In the short run: Real estate equities follow the
general stock market
•In the long run: Real estate equities reflect the direct
real estate
3. Literature: “Real Estate and Macroeconomics“
Author (Year)
Liu et al. (1997)
Real Estate Economics
Liang and McIntosh (1998)
Journal of Real Estate
Portfolio Management
Quan and Titman (1999)
Real Estate Economics
Sing (2004)
Journal of Property
Research
Hoesli et al. (2008)
Journal of Real Estate
Finance and Economics
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Method
Findings
According to Fama,
Schwert (1977) as well
as Geske, Roll (1983)
•Real estate do not represent a better hedge
against inflation compared to common stocks
Regressions and Rolling
Correlations
•Positive linkage between employment growth
of metropolitan areas and their property
markets
Regressions
•significant relation between real estate prices
and stock prices
•inflation-hedging characteristics in the long run
Multifactor Asset Pricing
Models (MAP)
Vector error correction
approach
•Macroeconomic risk factors are priced different
in securitized and direct real estate markets
•positive linkage between commercial real
estate and anticipated inflation
•Negative linkage due to inflation shocks
4. Methodology: Cointegration and VECM
Cointegration Tests
Vector Error Correction Model (VECM)
1. Trace-Test
H0 : There are at most r positive eigenvalues
H1 : There are more than r positive eigenvalues
p
λTrace = - T ∑ ln(1-λi)
∆Y
(n x 1) vector of the first
differences of stochastic variables
Гi
(n x n) matrices representing the
short-term dynamics
ß
(n x r) matrix representing the r
cointegrating vectors
α
(n x r) matrix containing the
loading parameter
μ
(n x 1) vector of constants
εt
error term
r+1
2. Maximum Eigenvalue
H0: There are exactly r positive eigenvalues
H1: There are exactly r+1 positive eigenvalues
λmax = - T ln(1 -λr+1)
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