Global Real Estate Markets Cycles and Fundamentals
description
Transcript of Global Real Estate Markets Cycles and Fundamentals
Yale School of Management
Global Real Estate Markets Cycles and Fundamentals
Bradford Case
William Goetzmann
K. Geert Rouwenhorst
Yale School of Management
Pension Plans and Real Estate
“Pension-plan investment in real estate is extremely limited and much smaller than one would expect based on most mean-variance models” – Ciochetti et al. (1999)
Target based on MV models: 15-20%Actual allocation: 3-4%
Yale School of Management
Arguments for Real Estate
Low correlation with other asset classes Stocks and Bonds (Titman and Quan, 1999)
Regional Diversification (Goetzmann and Ibbotson 1990)
International Diversification (Eichholz 1996, Eichholz and Harzell,
1996), Liu and Mei, 1998, and others)
Relatively high average return Goetzmann and Ibbotson (1990),
Provides a good hedge against inflation Goetzmann and Ibbotson (1990), Titman and Quan (1999), Anari and Kolari (2002)
Yale School of Management
Forms of Real Estate Investment
Direct holdings in properties Office Industrial Residential
Investment though REITS – stock market
Yale School of Management
Direct Investment versus Property Shares
Returns on direct investment difficult to measure due to: Appraisals Taxes Transactions Costs
By comparison, share price data: Behavioral biases
Yale School of Management
Real Estate Market Integration
Real estate is spacially immobile Expect regional factors to predominate Evidenced by diversification benefits
1991-1992: “Global” real estate crash Important common component to real estate
returns
Yale School of Management
Global versus local factors
Separate global from local factors in real estate returns
Are national real estate markets correlated through a global or local GDP factor?
Role for Shiller’s “macro futures”?
Yale School of Management
Preview
World real estate markets are correlated through common GDP effects
A global real estate portfolio is a bet on trends in global production
After controlling for global GDP, local effects are generally small.
Yale School of Management
Data
International Commercial Property Associates Yields and cap-rates Approximate effective rents
Prime industrial, office, and retail real estate in 22 cities around the world,1987-1997
Converted to U.S. real dollars
Yale School of Management
Total Returns
Y = going in cap rateR = effective rentAssumes perpetuity formula holds
Yale School of Management
A Decent Approximation?
U.S. Industrial property; .84 correlation to NCREIF
U.S. Office .54 correlation to NCREIFLittle correlation to NAREITAn instrument for appraisal index
Yale School of Management
Time
Return Values
Dec1987
Dec1997
Dec1987
Dec1988
Dec1989
Dec1990
Dec1991
Dec1992
Dec1993
Dec1994
Dec1995
Dec1996
0.00
-0.62
1.48
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
0.00
-0.20
-0.40
Australia I Belgium I Denmark I Finland I France I G-Dusseldorf I G-Frankfurt I HongKong IIreland I Italy I Malaysia I Netherlands I Portugal I Singapore I Spain I Sweden ISwitzerland I Thailand I UnKingdom I USA I Australia O Belgium O Canada O Denmark OFinland O France O G-Dusseldorf O G-Frankfurt O HongKong O Ireland O Italy O Japan OMalaysia O Netherlands O Portugal O Singapore O Spain O Sweden O Switzerland O Thailand OUnKingdom O USA O Australia R Belgium R Denmark R Finland R France R G-Dusseldorf RG-Frankfurt R HongKong R Ireland R Italy R Netherlands R Portugal R Singapore R Spain RSweden R Switzerland R Thailand R UnKingdom R
F i g u r e 1: A n n u a l R e t u r n s F o r a l l M a r k e t s a n d P r o p e r t y T y p e s : 1 9 8 7 - 1 9 9 7
Yale School of Management
Time
Return Values
Dec1987
Dec1997
Dec1987
Dec1988
Dec1989
Dec1990
Dec1991
Dec1992
Dec1993
Dec1994
Dec1995
Dec1996
0.00
-0.36
0.34
0.00
0.04
0.08
0.12
0.16
0.20
0.24
0.28
0.00
-0.04
-0.08
-0.12
-0.16
-0.20
-0.24
-0.28
-0.32
Australia G Belgium G Canada G Denmark G Finland G France G Germany G HongKong G Ireland GItaly G Japan G Malaysia G Netherlands G Portugal G Singapore G Spain G Sweden G Switzerland GThailand G UnKingdom G USA G
Figure 1: Dollar-Denominated changes in GDP deflated by the U.S. CPI, 1987 - 1997
Yale School of Management
CorrelationTest
Test 1: Remove own GDP effect via regression. Examine change in avg. correlation
Test 2: Remove global EW GDP effect via regression. Examine change in average correlation
GDP factor = real $-valued percent change in annual GDP
Yale School of Management
Removing GDP factors
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Industrial Office Retail
Return correlation
Residual correlation,removing own GDPfactorResidual corelation,removing EW worldGDP factor
Yale School of Management
Global vs. Local Factors
R2 from TS regression on global vs. local & global (Chow test)
Ratio: R2/global R2 Measures incremental value of local over
globalWhat countries are driven by local GDP
Yale School of Management
Local Factor Variance Ratio
0.01
0.1
1
10
100
Australia
Belgium
Canada
Denmark
Finland
France
G-Dusseldorf
G-Frankfurt
Hong K
ong
Ireland
ItalyJapan
Malaysia
Netherlands
Portugal
Singapore
Spain
Sweden
Switzerland
Thailand
UK USA
Industrial
Office
Retail
Yale School of Management
Time-Series Regressions
Country-by-country regressions GDP change, lagged GDP change and lagged return Contemporaneous GDP factor significant
U.S. regression three lags of GDP change three lags of returns Current GDP and lag-2 value significant
Yale School of Management
Diversification
Average percentage risk reduction by adding countries to portfolio
Benefits to real estate diversification similar to equity markets
Industrial has greatest benefitOffice has least benefit
Yale School of Management
10 20
40
60
80
10
0
Benefits of Global Diversification in Real Estate by Property-Type
IndustrialOfficeRetailStock Markets
Yale School of Management
GDP-Hedged Diversification
How well does international diversification work if you could hedge GDP risk?
Diversification limits: Unhedged: 29.8%. (70.2% reduction) Hedged against GDP risk: 8.6%. (>90%
reduction)
Robert Shiller: “Macro Markets”
Yale School of Management
5 10 15 20
20
40
60
80
10
0Diversification Benefits for Unhedged and GDP-Hedged Industrial Real Estate
UnhedgedHedged
Yale School of Management
Conclusions
Cross-border correlations of real estate captured by common exposure to world GDP
Real estate is fundamentally local, but its covariance is global