Indirect Real Estate Investments and their Links with Properties, Common Stocks and the Macroeconomy...
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Transcript of Indirect Real Estate Investments and their Links with Properties, Common Stocks and the Macroeconomy...
Indirect Real Estate Investments and their Links with Properties, Common Stocks and the Macroeconomy
Alexander SchätzEuropean Real Estate Society Conference 2010 in Milano, June 23-26, 2010
Seite 2
Approach
1. Conventional Approach US Model: NAREIT Equity REIT Index, NCREIF Property Index, S&P 500 UK Model: 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 3 Assets (Direct RE Investment, General Stocks, Indirect RE Investments) GDP CPI Short-Term Interest Rates Long-Term Interest Rates / Mortgage Rates
Seite 3
Sample Selection and Structural BreaksResults for the US and UK Markets
Approach
Conventional Macroeconomic
3 Assets CPI, GDPCPI, GDP, Long-
Term Rates (10y)
CPI, GDP, Short-Term Rates (3m)
Q1 1978 – Q3 2009Instable
Dubious signs
Instable Dubious signs
Instable Dubious signs
Instable Dubious signs
Q1 1978 – Q2 2008Instable
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
Seite 4
0
10
20
30
40
50
60
70
80
2 4 6 8 10 12 14 16 18 20
NAREIT NCREIF SP500
Variance Decomposition of NAREIT
0
20
40
60
80
100
2 4 6 8 10 12 14 16 18 20
RESTOCK IPD FTSE
Variance Decomposition of RESTOCK
Conventional Approach VECM (β – vectors) and Variance Decomposition
Sample: Q1 1992 – Q3 2009
% %
Time Time
Seite 5
Real Estate and the MacroeconomyVECM (β – vectors)
Sample: Q1 1992 – Q3 2009
Indirect Investment
Direct Investment
Seite 6
Macroeconomic ApproachVECM (β – vectors)
Sample: Q1 1992 – Q3 2009
Macroeconomic Approach including Short-Term Interest Rates
2
Seite 7
Macroeconomic Approach Variance-Decomposition
United States United Kingdom
0
10
20
30
40
50
60
2 4 6 8 10 12 14 16 18 20
NCREIF NAREIT CPIINTER GDP SP500
Variance Decomposition of NAREIT
0
10
20
30
40
50
60
70
2 4 6 8 10 12 14 16 18 20
IPD RESTOCK CPIINTER GDP FTSE
Variance Decomposition of RESTOCK%%
Time Time
Seite 8
Empirical Results: VECM (β – vectors)
Sample: Q1 1992 – Q3 2009
Macroeconomic Approach including Long-Term Interest Rates
Seite 9
Empirical Results: VECM (β – vectors)
0
10
20
30
40
50
60
70
2 4 6 8 10 12 14 16 18 20
NCREIF NAREIT CPILTRATES GDP SP500
Variance Decomposition of NAREIT
0
10
20
30
40
50
60
70
2 4 6 8 10 12 14 16 18 20
IPD RESTOCK CPIINTER GDP FTSE
Variance Decomposition of RESTOCK
United States United Kingdom
%%
Time Time
Seite 10
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.
Seite 11
Thank you for your attention!
Seite 12
Seite 13
3. Literature: “Features of Real Estate Assets“
Author (Year) Method Findings
Ling and Naranjo (1999)
Real Estate Economics
Multifactor Asset Pricing Model (MAP)
•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
Bond et al. (2003)
Real Estate EconomicsCAPM
•Substantial variation in mean returns and standard deviations across the examined countries
Hamelink and Hoesli (2004)
Real Estate Economics
Cross-sectional regressions
•Dominant role of country factors
•Relevance of size factors and value/growth factors
Westerheide (2006)
ZEW Working Paper
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
Johansen Procedure
•In the short run: Real estate equities follow the general stock market
•In the long run: Real estate equities reflect the direct real estate
Seite 14
Author (Year) Method Findings
Liu et al. (1997)
Real Estate Economics
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
Liang and McIntosh (1998)
Journal of Real Estate Portfolio Management
Regressions and Rolling Correlations
•Positive linkage between employment growth of metropolitan areas and their property markets
Quan and Titman (1999)
Real Estate Economics Regressions
•significant relation between real estate prices and stock prices
•inflation-hedging characteristics in the long run
Sing (2004)
Journal of Property Research
Multifactor Asset Pricing Models (MAP)
•Macroeconomic risk factors are priced different in securitized and direct real estate markets
Hoesli et al. (2008)
Journal of Real Estate Finance and Economics
Vector error correction approach
•positive linkage between commercial real estate and anticipated inflation
•Negative linkage due to inflation shocks
3. Literature: “Real Estate and Macroeconomics“
Seite 15
4. Methodology: Cointegration and VECM
Cointegration Tests
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)
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)
Vector Error Correction Model (VECM)
∆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
εterror term