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Finance Series: real-estate

The use of listed real estate securities in asset management

A literature review and summary of current practical application.

Author(s): Alex Moss - Cass Business School; Andrew Baum - University of Oxford - Said Business School

Investors have historically used listed real estate for a variety of aims, from general exposure to the asset class to meeting specific returns characteristics such as inflation hedging. The Global Financial Crisis of 2007-8 however prompted a reassessment of the risk and return profile of listed real estate.

In light of this, the aims of the study The use of listed real estate securities in asset management are:

(i) to conduct a review of academic literature concerning the use and performance of listed real estate, both as a separate asset class and as part of multi-asset portfolios, and

(ii) to examine how institutions are using listed real estate to achieve their investment 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, more so than to the direct property market, with higher levels of observed volatility and high positive correlations to the stock market.

However, an analysis of returns over a longer period indicate that there is a common real estate factor that drives the returns of both direct and listed markets, and that pricing in the listed market leads direct market indices. Whether this can lead to arbitrage is 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. However, there is some evidence that the benefits of diversification may be reduced during periods of financial distress, with sensitivity to movements in the stock market increasing.

There is some evidence to suggest that the inclusion of both direct and listed real estate in a multi-asset portfolio enhances the overall portfolio return and reduces portfolio risk.

The study finds 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.

Listed real estate is popular with investors as it offers, among other things, greater liquidity than direct real estate, an above-average and secure dividend stream, and a form of protection against future inflation shocks.

The published version of the paper is available for download at the link below.

Attachment(s)
{The use of listed real estate securities in asset management}{https://www.cass.city.ac.uk/__data/assets/pdf_file/0003/442524/use-of-listed-real-estate-securities-in-asset-management-EPRA-1365168705527.pdf}
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