City Research Online

Abstract

Investors have historically used listed real estate to achieve a number of outcomes, ranging from general exposure to the asset class to meeting specific returns characteristics such as inflation hedging and taxefficient income generation. However, following the events of the last five years, in common with other asset classes there is currently a re-assessment of the risk and return profile of listed real estate.

The purpose of this study is twofold: (i) to conduct a review of academic literature and evidence on the use and performance of listed real estate, both as a separate asset class and in multi-asset portfolios, and (ii) to examine in detail how institutions are using listed real estate to achieve their investment objectives, and the role listed real estate is playing in the new fund structures they are creating to meet investor objectives.

A review of the literature suggests that in the short-term listed real estate displays similar risk and return characteristics to the stock market rather than the direct property market, with higher levels of observed volatility and high positive correlations to the stock market. However, an analysis of returns over longer time periods indicate that there is a common real estate factor that drives the returns of both the direct and listed markets and that pricing in the listed market leads direct market indices. Whether this can lead to arbitrage is much less clear, as direct market indices may lag the direct market.

In a multi-asset portfolio the inclusion of listed real estate can provide both return enhancement and risk reduction to the portfolio, although recent evidence suggests that the diversification benefits may be reduced during periods of financial distress, with the correlation and sensitivity to movements in the stock market increasing.

When including both direct and listed real estate in a multi-asset portfolio there is some evidence to suggest that the inclusion of both enhances the overall portfolio return and reduces (diversifies) portfolio risk.

With regard to practical applications, we find that listed real estate is being used to fulfil an increasing number of investment objectives, both as a separate asset class and in conjunction with other assets such as unlisted funds, direct property, and infrastructure/commodities.

The reason for this popularity with both asset allocators and retail investors lies in the specific and definable investment characteristics which listed real estate can provide; greater liquidity than direct real estate, the returns that are linked to it, an above-average and secure dividend stream, a form of protection against future inflation shocks, and a geared exposure to improving asset prices.

Publication Type:	Report
Departments:	Bayes Business School > Finance

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