City Research Online

Abstract

This study examines the issue of convergence in the monthly returns, rental growth and yields for 10 market segments in the UK direct real estate market, using principal component analysis, over the period from 1987 to 2014. The principal component approach provides an assessment of the extent to which the variance of the market segments can be represented by a single common factor, explaining their long-run behaviour, and the degree of independence between the market segments.

The results suggest that there is strong evidence of convergence over the entire sample period in relation to monthly returns and yields but less evidence of convergence in rental growth, which confirms the findings in previous studies in international securitised and direct markets markets. There is also an indication that convergence is period-specific and was particularly strong in the period of the Global Financial Crisis.

The convergence in returns has crucial implications for investors as it leaves investors exposed to the same structural shocks and so magnifies the importance of volatility spillover effects, limits their ability to create well-diversified portfolios, and make it more difficult for fund managers to outperform the market.

Publication Type:	Article
Additional Information:	Published by Emerald, 2017.
Publisher Keywords:	UK direct real estate, Returns, Rents, Yields, Principal Component Analysis, Convergence
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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