Time varying beta risk in listed real estate

What is it about?

Listed real estate securities have historically been used to achieve an exposure to the real estate asset class and to obtain a broad spectrum of other specific features such as return enhancement, but whether they must be associated with the direct property or with the broad stock market is deceptive on a merely theoretical basis. Moreover, the Global Financial Crisis (GFC) has questioned their risk/return characteristics. The main objective of this study is to assess whether listed real estate securities are still dissimilar enough from the broad stock market to provide remarkable diversification benefits for a long term investor. The analysis has been developed on the FTSE EPRA/NAREIT Developed Index and at country level (US, UK, France, Japan, Singapore, Hong Kong and Australia) from November 2001 to October 2013. We analysed the real estate index over a broad market index and adjusted for possible bias related to heteroskedasticity and autocorrelation, using a least squared regression with Newey-West HAC Correction. A Recursive Least Squares was also used to test the stability of the parameters with the CUSUM squared test and the Chow test. Finally, we tested for cointegration with the Augmented Dickey Fuller and the Engle Granger tests. We found that after the GFC, the Beta risk related to the stock market has witnessed a sharp increase, but with differences between countries. Whilst the US, the UK and France have experienced a trend similar to the one described for the FTSE EPRA/NAREIT Developed Index, the Asian Markets depict a quite stable Beta over the full sample (aside from a gradual increase for the Australian market). We found evidence of a structural break in conjunction with the 2008 crisis in the US, UK and France only. Listed real estate securities, even if characterised by time varying Beta-Risk and partially reduced diversification benefits, are still worth being included in long term horizon portfolios. However, warier considerations should be made before investing in the Asian markets where evidence of cointegration was found only for the Japanese market.

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