Are Listed Equity REITs the Same as Unlisted Real Estate? Bibliography


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This bibliography has web links and quotations from 14 independent academic studies of the relationship between listed equity REIT returns and unlisted real estate returns (direct holdings or private equity funds).
These papers do not address which real estate investments provide better returns. See my separate bibliography at for studies comparing performance.

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Are Listed Equity REITs the Same as Unlisted Real Estate? Bibliography

  1. 1. BIBLIOGRAPHY ON RELATIONSHIP BETWEEN LISTED EQUITY REITS AND UNLISTED REAL ESTATE 2013 Ang, Nabar & Wald [2013]: Andrew Ang, Neil Nabar and Samuel Wald, “Searching for a Common Factor in Public and Private Real Estate Returns,” April 2013. Investors can obtain exposure to real estate through liquid publicly traded REITs or illiquid direct real estate investment. In the long run, REITs and direct real estate should be driven by common shocks because they both represent ownership of real estate. … Our finding that both REITs and private real estate investments have different, idiosyncratic components further suggests there may be a short- and medium-term diversification benefit to holding both in an institutional portfolio. Bond & Chang [2013]: Shaun A. Bond and Qingqing Chang, “REITs and the Private Real Estate Market,” in H. Kent Baker and Greg Filbeck, eds., Alternative Investments: Instruments, Performance, Benchmarks, and Strategies, Wiley, 2013. The findings suggest that REITs and the private real estate market adjust together toward a long-run equilibrium. Hoesli & Oikarinen [2013]: Martin Hoesli and Elias Oikarinen, “Are Public and Private Asset Returns and Risks the Same? Evidence from Real Estate Data,” November 2013. The results provide evidence of cointegration between the public and private markets in the four U.S. sectors included in the analysis and in one of the two U.K. sectors. Thus, the analysis shows that while in the short run the observed REIT and direct real estate returns can substantially deviate from each other due to factors such as data complications, market frictions, and slow adjustment to changes in the fundamentals in the private market, in the long term public and private real estate returns are tightly linked after catering for the effects of property type, leverage, and management costs. … We also find that volatilities generally do not differ significantly between REIT and direct real estate regardless of sector and investment horizon. … As securitized real estate assets enable diversification with smaller amounts of capital, and the liquidity is better and transaction costs are lower in the public market than in the private market, investors who have limited amounts of capital and highly value liquidity and small transaction costs should tile their real estate holdings towards REITs. 2012 Boudry et al. [2012]: Walter I. Boudry, N. Edward Coulson, Jarl G. Kallberg and Crocker H. Liu, “On the Hybrid Nature of REITs,” Journal of Real Estate Finance and Economics 44(1-2):230-249, January 2012. Using transaction rather than appraisal based data we find significant evidence that REITs and the underlying real estate markets are related. Furthermore, the relation appears to be stronger at longer horizons: in particular in annual rather than quarterly data. Hoesli & Oikarinen [2012]: Martin Hoesli and Elias Oikarinen, “Are REITs Real Estate? Evidence from International Sector Level Data,” Journal of International Money and Finance 31(7):1823-1850, November 2012.
  2. 2. Our findings, based on sector level REIT and direct real estate indices for the U.S. and U.K., suggest that securitized and direct real estate markets are tightly linked in the long run. … The resemblance between REITs and direct real estate is substantially greater than that between REITs and the general stock market. Pedersen et al. [2012]: Niels K. Pedersen, Fei He, Ashish Tiwari, and Andrew M. Hoffmann, “ Modeling the Risk Characteristics of Real Estate Investments,” PIMCO, January 2012. After correcting for biases, we conclude that: (1) the implied return correlations between public REITs and private real estate investments fell in the range of 60% to 80% from January 1989 through June 2011; (2) the volatility of private real estate is about 2.5 times higher than implied by unadjusted volatility estimates: furthermore, the volatility of private real estate is generally comparable to the risk of public REIT investments; (3) the implied correlations of real estate with equity markets are much higher than appraisal-based returns suggest: the implied correlations from our risk factor model are between 60% and 73%. Stefek & Suryanarayanan [2012]: Dan Stefek and Raghu Suryanarayanan, “Private and Public Real Estate: What is the Link?” Journal of Alternative Investments 14(3):66-75, Winter 2012. After accounting for appraisal smoothing and for the lead-lag relationship between public and private returns, we reveal a strong link between U.K. public and private real estate. Further, the link is stronger at longer horizons. Yunus, Hansz & Kennedy [2012]: Nafeesa, Yunus, J. Andrew Hansz, and Paul J. Kennedy, “Dynamic Interactions Between Private and Public Real Estate Markets: Some International Evidence,” Journal of Real Estate Finance and Economics 45(4):1021-1040, November 2012. This study analyzes the dynamic interaction between the private (unsecuritized) and public (securitized) real estate markets of Australia, Netherlands, UK, and the US. … There exist stable, long run relationships between the private and public real estate markets of each country. 2011 Oikarinen, Hoesli & Serrano [2011]: Elias Oikarinen, Martin Hoesli, and Camilo Serrano, “The Long-Run Dynamics Between Direct and Securitized Real Estate,” Journal of Real Estate Research 33(1):73-103, January-March 2011. Due to the tight long-run interdependence, the longer the investment horizon is, the greater the degree of substitutability between REITs and direct real estate in a mixed-asset portfolio. In other words, the correlation between NAREIT and NCREIF returns approaches one as the investment horizon lengthens. … Since the two real estate indices are cointegrated with one another and not with the stock market, REITs are likely to bring similar long-term diversification benefits to a stock portfolio as direct real estate. 2010 Kutlu [2010]: Vesile Kutlu, “The Long-Term Relation Between Indirect and Direct Real Estate,” MSc thesis, Tilburg University, August 2010. This thesis investigates the relationship between direct and indirect real estate both in the short run and in the long run in a panel based framework. Panel cointegration analysis confirms the
  3. 3. presence of a cointegration relation between the two assets which means that they are substitutes for investors in the long run. As a consequence, investors should treat the two real estate categories as a single asset class in the long run since they imply the same level of risk and return characteristics over long horizons…. Lee & Chiang [2010]: Ming-Long Lee and Kevin C.H. Chiang, “Long-Run Price Behaviour of Equity REITs: Become More Like Common Stocks After the Early 1990s?” Journal of Property Investment & Finance 28(6):454-465, 2010. The results show that REITs behave like common stocks during the earlier 1978-1993 sub-period. In contrast, REITs become less like common stock and more like private real estate after the early 1990s structural change. 2009 Chiang [2009]: Kevin C.H. Chiang, “Discovering REIT Price Discovery: A New Data Setting,” Journal of Real Estate Finance and Economics 39(1):74-91, July 2009. Our study of lead-lag relationship between real returns and public returns indicates that lagged public returns are useful in predicting private returns. That is, the information contained in the lags of public returns is subsequently transmitted into the private appraisal-based sector. The result is consistent with the idea that public markets are more efficient in incorporating information into prices. Li, Mooradian & Yang [2009]: Jinliang Li, Robert M. Mooradian, and Shiawee X. Yang, “The Information Content of the NCREIF Index,” Journal of Real Estate Research 31(1):93-116, January-March 2009. The general result of the paper is that appraisal-based returns lag NAREIT returns and there is a causality effect implying that NAREIT returns provide ‘information flow’ into the appraisal -based returns. This suggests that appraisers use REITs as a proxy for performance. 2008 Lee, Lee & Chiang [2008]: Ming-Long Lee, Ming-Te Lee, and Kevin C.H. Chiang, “Real Estate Risk Exposure of Equity Real Estate Investment Trusts,” Journal of Real Estate Finance and Economics 36(2):165-181, February 2008. Our results have implications. First, equity REITs are capable of providing investors real estate exposures. … Second, our evidence supports a long list of studies…which advocate the use of REITs to capture the real estate factor. Morawski, Rehkugler & Fϋss [2008]: Jaroslaw Morawski, Heinz Rehkugler, and Roland Füss, “The Nature of Listed Real Estate Companies: Property or Equity Market?” Financial Markets and Portfolio Management 22(2):101-126, June 2008. The fact that correlations between returns of real estate stocks and direct real estate are clearly higher for longer holding periods corresponds to expectations. Since direct real estate qualifies as a long-term investment, it should also influence the performance of real estate stocks in a similar manner. This was demonstrated with the correlation coefficients between long-term returns on the one hand, and with the cointegrating vectors of respective time series on the other hand for both the USA and the UK.