Direct investment in real estate

Momentum strategies have the potential to generate extra profits in private real estate markets. Tests of a variety of frequencies of portfolio reweighting identify periods of winner and loser performance. There are strong potential gains from momentum strategies that are based on prior returns over a 6- to 12-month period. Whether these gains are attainable for real-world investors depends on transaction costs, but some momentum strategies do produce net excess returns. The findings hold even if returns are unsmoothed to reflect underlying market prices.

Pricing inefficiencies in private real estate markets using total return swaps

Efficient markets should guarantee the existence of zero spreads for total return swaps. However, real estate markets have recorded values that are significantly different from zero in both directions. Possible explanations might suggest non-rational behaviour by inexperienced market players or unusual features of the underlying asset market. We find that institutional characteristics in the underlying market lead to market inefficiencies and, hence, to the creation of a rational trading window with upper and lower bounds within which transactions do not offer arbitrage opportunities. Given the existence of this rational trading window, we also argue that the observed spreads can substantially be explained by trading imbalances due to the limited liquidity of a newly formed market and/or to the effect of market sentiment, complementing explanations based on the lag between underlying market returns and index returns.