The relative importance of sectors v's regions in determining property returns

A number of studies have investigated the benefits of sector versus regional diversification within a real estate portfolio without explicitly quantify the relative benefits of one against the other. This paper corrects this omission by adopting the approach of Heston and Rouwenhorst (1994) and Beckers, Connor and Curds (1996) on a sample of 187 property data points using annual data over the period 1981-1995. The general conclusion of which is the sector diversification explains on average 22% of the variability of property returns compared with 8% for administratively defined regions. A result in line with previous work. Implying that sector diversification should be the first level of analysis in constructing and managing the real estate portfolio. However, unlike previous work functionally defined regions provide less of an explanation of regional diversification than administrative regions. Which may be down to the weak definition of economic regions employed in this study.

Sector and regional factors in real estate returns

This paper presents a simple method to measure the effect of sector and regional factors in real estate returns, and thus provides a quantitative framework for analysing the relative impact of these two diversification categories to real estate portfolio selection. Using data on Retail, Office and Industrial properties spread across 326 real estate locations in the UK, over the period 1981 to 1995, the results show that the performance of real estate is largely sector-driven. A result in line with previous work. Which implies that the sector composition of the real estate fund should be the first level of analysis in constructing and managing the real estate portfolio. As a consequence real estate fund managers need to pay more attention to the sector allocation of their portfolios than the regional spread.

The inter-temporal stability of real estate returns: an empirical investigation

This paper examines one of the central issues in the formulation of a sector/regional real estate portfolio strategy, i.e. whether the means, standard deviations and correlations between the returns are sufficiently stable over time to justify using ex-post measures as proxies of the ex-ante portfolio inputs required for MPT. To investigate these issues this study conducts a number of tests of the inter-temporal stability of the total returns of the 19 sector/regions in the UK of the IPDMI. The results of the analysis reveal that the theoretical gains in sector and or regional diversification, found in previous work, could not have been readily achieved in practice without almost perfect foresight on the part of an investor as means, standard deviations and correlations, varied markedly from period to period.

Comovement in UK real estate sector returns

Engle et al. (1990) distinguish between 'heat waves' and 'meteor showers' in an analogy which tries to differentiate between particular effects, not transmitted among markets, and general effects, which tend to affect all the markets, although different markets can be affected to different degrees. This paper applies this approach to the study of the monthly returns of four real estate market sectors: Office, Retail, Industrial and Retail Warehouses in the UK over the period 1979:2 to 1997:12. A VAR methodology used with the aim of detecting the causal relations and dynamic interactions among sector returns, as well as the transmission mechanisms of their information flows. The results obtained permit us to conclude that there is a good deal of integration between the monthly return time series for all the sectors. Therefore, diversification across real estate market sectors does not allow for the reduction of risk without sacrificing expected returns.

Asset allocation, cross-class correlation and the structure of property returns

Practical applications of portfolio optimisation tend to proceed on a “top down” basis where funds are allocated first at asset class level (between, say, bonds, cash, equities and real estate) and then, progressively, at sub-class level (within property to sectors, office, retail, industrial for example). While there are organisational benefits from such an approach, it can potentially lead to sub-optimal allocations when compared to a “global” or “side-by-side” optimisation. This will occur where there are correlations between sub-classes across the asset divide that are masked in aggregation – between, for instance, City offices and the performance of financial services stocks. This paper explores such sub-class linkages using UK monthly stock and property data. Exploratory analysis using clustering procedures and factor analysis suggests that property performance and equity performance are distinctive: there is little persuasive evidence of contemporaneous or lagged sub-class linkages. Formal tests of the equivalence of optimised portfolios using top-down and global approaches failed to demonstrate significant differences, whether or not allocations were constrained. While the results may be a function of measurement of market returns, it is those returns that are used to assess fund performance. Accordingly, the treatment of real estate as a distinct asset class with diversification potential seems justified.

The future returns for property required by UK pension funds

In the 1970s Real Estate represented over 17% of the average pension funds total assets. Today such funds hold less than 4%, a figure not seen since the 1960s. This reduction in Real Estate holdings is mainly attributable to the relatively poor performance of Real Estate against other asset classes since the 1980s. Whether pension funds will increase their holding at any point in the future depends therefore on the expected return of Real Estate by comparison with that required to justify a particular asset holding. Using the technique of Modern Portfolio Theory (MPT), this paper assesses the required return that Real Estate would have to offer to justify a 15% holding in a mixed asset portfolio. This figure and the risk/return characteristics of the major asset classes is taken from survey data. Under a number of scenarios it is found that Real Estate can play a part in a mixed asset portfolio at the 15% level. In some cases however, the expected returns of Real Estate are not sufficient to justify a weight of 15% in this asset.

The future returns for property required by UK pension funds: the BHS data

Previous studies of the place of Property in the multi-asset portfolio have generally relied on historical data, and have been concerned with the supposed risk reduction effects that Property would have on such portfolios. In this paper a different approach has been taken. Not only are expectations data used, but we have also concentrated upon the required return that Property would have to offer to achieve a holding of 15% in typical UK pension fund portfolios. Using two benchmark portfolios for pension funds, we have shown that Property's required return is less than that expected, and therefore it could justify a 15% holding.

Required returns for real estate in UK pension fund portfolios

The position of Real Estate within a multi-asset portfolio has received considerable attention recently. Previous research has concentrated on the percentage holding property would achieve given its risk/return characteristics. Such studies have invariably used Modern Portfolio Theory and these approaches have been criticised for both the quality of the real estate data and problems with the methodology itself. The first problem is now well understood, and the second can be addressed by the use of realistic constraints on asset holdings. This paper takes a different approach. We determine the level of return that Real Estate needs to achieve to justify an allocation within the multi asset portfolio. In order to test the importance of the quality of the data we use historic appraisal based and desmoothed returns to examine the sensitivity of the results. Consideration is also given to the Holding period and the imposition of realistic constraints on the asset holdings in order to model portfolios held by pension fund investors. We conclude, using several benchmark levels of portfolio risk and return, that using appraisal based data the required level of return for Real Estate was less than that achieved over the period 1972-1993. The use of desmoothed series can reverse this result at the highest levels of desmoothing although within a restricted holding period Real Estate offered returns in excess of those required to enter the portfolio and might have a role to play in the multi-asset portfolio.

Modelling economic returns to plant variety protection in the UK

This paper attempts an empirical assessment of the incentive effects of plant variety protection regimes in the generation of crop variety innovations. A duration model of plant variety protection certificates is used to infer the private appropriability of returns from agricultural crop variety innovations in the UK over the period 1965-2000. The results suggest that plant variety protection provides only modest appropriability of returns to innovators of agricultural crop varieties. The value distribution of plant variety protection certificates is highly skewed with a large proportion of innovations providing virtually no returns to innovators. Increasing competition from newer varieties appears to have accelerated the turnover of varieties reducing appropriability further. Plant variety protection emerges as a relatively weak instrument of protection.

Serial persistence in individual real estate returns in the UK

Purpose – The purpose of this paper is to examine individual level property returns to see whether there is evidence of persistence in performance, i.e. a greater than expected probability of well (badly) performing properties continuing to perform well (badly) in subsequent periods. Design/methodology/approach – The same methodology originally used in Young and Graff is applied, making the results directly comparable with those for the US and Australian markets. However, it uses a much larger database covering all UK commercial property data available in the Investment Property Databank (IPD) for the years 1981 to 2002 – as many as 216,758 individual property returns. Findings – While the results of this study mimic the US and Australian results of greater persistence in the extreme first and fourth quartiles, they also evidence persistence in the moderate second and third quartiles, a notable departure from previous studies. Likewise patterns across property type, location, time, and holding period are remarkably similar. Research limitations/implications – The findings suggest that performance persistence is not a feature unique to particular markets, but instead may characterize most advanced real estate investment markets. Originality/value – As well as extending previous research geographically, the paper explores possible reasons for such persistence, consideration of which leads to the conjecture that behaviors in the practice of institutional-grade commercial real estate investment management may themselves be deeply rooted and persistent, and perhaps influenced for good or ill by agency effects. - See more at: http://www.emeraldinsight.com/journals.htm?articleid=1602884&show=abstract#sthash.hc2pCmC6.dpuf

Does consumption-wealth ratio signal stock returns? VECM results for Germany

This paper studies the signalling effect of the consumption−wealth ratio (cay) on German stock returns via vector error correction models (VECMs). The effect of cay on U.S. stock returns has been recently confirmed by Lettau and Ludvigson with a two−stage method. In this paper, performance of the VECMs and the two−stage method are compared in both German and U.S. data. It is found that the VECMs are more suitable to study the effect of cay on stock returns than the two−stage method. Using the Conditional−Subset VECM, cay signals real stock returns and excess returns in both data sets significantly. The estimated coefficient on cay for stock returns turns out to be two times greater in U.S. data than in German data. When the two−stage method is used, cay has no significant effect on German stock returns. Besides, it is also found that cay signals German wealth growth and U.S. income growth significantly.

Quantile forecasts of daily exchange rate returns from forecasts of realized volatility

Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of five currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of different measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main findings are that the Heterogenous Autoregressive model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts