Real Estate & Planning: www.henley.ac.uk/repwww.henley.ac.uk/rep

Steven Devaney (University of Reading), Qin Xiao (Hull University Business School) and Mark Clacy-Jones (Investment Property Databank)

Listed and direct real estate investment: A European analysis

Real Estate & Planning: www.henley.ac.uk/rep 2

• Ongoing interest in risk and return of real estate– Investor and regulatory angles

• Interest in the relationship between different forms of real estate– Substitutes or complements in a portfolio

context?• Lots of academic and practice-based research,

esp. US• BUT most evidence relies on valuation based

measures of direct real estate returns

Context for study

Real Estate & Planning: www.henley.ac.uk/rep 3

• Early literature suggests that listed real estate1

– Was more volatile than direct real estate– Had a low correlation with the direct market– Movements led those in direct market series

• Second wave of studies confirmed long run links using co-integration2

– Listed sector returns led direct market, but there may also be a feedback effect

1 – e.g. Gyourko & Keim (1992), Myer & Webb (1993), Fisher et al. (1994), Eichholtz & Hartzell (1996)2 – e.g. Wang et al. (1997), Glascock et al. (2000), Tuluca et al. (2000)

Previous literature

Real Estate & Planning: www.henley.ac.uk/rep 4

• With growth in data availability, recent studies are– Extending the spatial scope of such research3

– Using transaction based series for the direct market

• Oikarinen et al. (2011) and Hoesli & Oikarinen (2012)– Use TBIs for US real estate market– Confirm long run links between listed and

direct RE– Find that listed sector still leads direct market

– with predictability solely from one to other3 – e.g. Hoesli & Serrano (2007), Yunus et al. (2010)

Recent literature

Real Estate & Planning: www.henley.ac.uk/rep 5

• Re-examines characteristics and relationships using– FTSE/EPRA NAREIT indices for listed real

estate– IPD valuation based indices for direct real

estate– IPD transaction-linked indices for direct

market• Six European real estate markets from c.2001 to

2011• Includes comparisons with some US series• Paper:

www.epra.com/research-and-indices/research/

What this paper does

Real Estate & Planning: www.henley.ac.uk/rep

Real Estate & Planning: www.henley.ac.uk/rep 7

• Based on sales recorded in IPD databanks. Two-step process involves1

1. Model of price-valuation relationship2

ln Pi = β0 + β1 ln Ai + ∑ δj Ci,j + ∑ λk Si,k + εi

2. Mass appraisal of held assets to create index• Samples and weighting reflect institutional

property market in each country1 – See Fisher-Geltner-Pollakowski (2007), Devaney & Martinez Diaz (2011)2 – P = price, A = appraisal, C = country dummies, S = sector dummies

Transaction linked indices

Real Estate & Planning: www.henley.ac.uk/rep 8

• Basic comparisons– Means, standard deviations, autocorrelations– Visual peaks and troughs– Cross-correlations – contemporaneous and

lagged• Formal time-series techniques

– Spectral analysis – testing for frequency of cycles

– Cross-spectral analysis – testing for shared cycles (coherence) and whether they are synchronised (phase)

Methods

Real Estate & Planning: www.henley.ac.uk/rep 9

2001

.420

02.320

03.220

04.120

04.420

05.320

06.220

07.120

07.420

08.320

09.220

10.120

10.420

11.3

020406080

100120140160

IPD TLI IPD VBI FTSE EPRA/NAREIT

Capi

tal r

etur

n in

dex

(200

5 =

100)

Indices – NetherlandsRtn σ ρt, t-1

EBI 0.4 11.5 0.06TBI 0.4 2.1 0.27VBI 0.3 1.1 0.68

Real Estate & Planning: www.henley.ac.uk/rep

Timing of index peakEBI TBI VBI

France 2007.1 2008.1 2007.4Germany 2006.4 - -Netherlands 2007.1 2008.3 2008.3Sweden 2007.1 2008.2 2007.4Switzerland 2007.1 - -UK 2006.4 2007.3 2007.2USA 2007.1 2007.2 2008.1

Less smooth, but not less lagged – why?Modelling, recording and sample selection influences

Real Estate & Planning: www.henley.ac.uk/rep 11

2001

.420

02.320

03.220

04.120

04.420

05.320

06.220

07.120

07.420

08.320

09.220

10.120

10.420

11.3

020406080

100120140160

IPD TLI IPD VBI FTSE EPRA/NAREIT

Capi

tal r

etur

n in

dex

(200

5 =

100)

Indices – Germany

Real Estate & Planning: www.henley.ac.uk/rep 12

• Possible cycles linked to:– Business cycle (4-5 years)– Property development cycle (8-10 years)– Larger urban development cycles (16-20

years +)• BUT only 40-48 quarters of data for most direct

real estate series• Yet similarities between series could be

detected• Listed sector leads in marking out shared longer

cycle

Spectral & cross-spectral results

Real Estate & Planning: www.henley.ac.uk/rep 13

Cross-spectral results

2.00

2.35

2.86

3.64

5.00

8.00

20.00

00.10.20.30.40.50.60.70.80.9

1 EBI and VBIEBI and TBIVBI and TBI

Frequency (quarters)

EBI leads TBI

(quarters)France 1.8Germany 2.1Netherlands 3.3Sweden 4.3Switzerland 1.5UK 0.6USA 2.0

Phase - all countries

Coherence - France

Real Estate & Planning: www.henley.ac.uk/rep 14

• Different series, different countries, different periods… BUT similar story

• Listed sector returns lead direct market returns while long-run links are stronger

• In Europe, TLIs do not consistently lead VBIs – puzzle?

• Length of most TLIs and VBIs too short to be conclusive on cyclical behaviour

• BUT enhancements to length and construction of TLIs may be possible

Summary

Real Estate & Planning: www.henley.ac.uk/rep 15

The research team thanks the European Public Real Estate Association (EPRA) for providing funding and data for this research

The views expressed are those of the authors and not necessarily of their respective organisations

Contact author: Dr Steven Devaney (s.devaney@reading.ac.uk)