International listed real estate returns: evidence from the global financial crisis
| Pages | 72-91 |
| DOI | https://doi.org/10.1108/JPIF-03-2018-0021 |
| Date | 09 January 2019 |
| Published date | 09 January 2019 |
| Author | Alain Coën,Patrick Lecomte |
| Subject Matter | Property valuation & finance,Real estate & property |
International listed real estate
returns: evidence from the
global financial crisis
Alain Coën
Department of Finance, Université du Québec à Montréal, Montreal, Canada, and
Patrick Lecomte
Department of Real Estate and Finance, Henley Business School,
University of Reading Malaysia, Iskandar Puteri, Malaysia
Abstract
Purpose –The purpose of this paper is to analyze and revisit the risk and performance of publicly traded
real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global
Financial Crisis, in presence of errors-in-variables (EIV) and illiquidity (measured by serial correlation,
following Getmansky et al. (2004)).
Design/methodology/approach –The authors extend the seminal work of Bond et al. (2003), and shed a
new light on the relative performance of listed real estate before and after the GFC. First, the authors suggest
the use of various asset pricing models (APM) including the Fama and French (2015) five-factor APM with
global and country-level factors. Second, the authors implement unbiased estimators to correct for the
econometric bias induced by EIV in APM. Third, the authors deal with the impact of illiquidity (measured by
serial correlation) on the risk properties of international securitized real estate returns.
Findings –The findings show that post-GFC, a radical change in international listed real estate risk factors
has resulted in more homogeneous markets internationally and less diversification opportunities for
international investors.
Practical implications –The authors suggest the use of robust linear APM (including the Fama and
French (2015) five-factor APM) to analyze the risk and performance of publicly traded real estate companies
from 14 countries over the period 2000–2015.
Originality/value –The authors analyze and revisit the risk and performance of publicly traded real
estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global
Financial Crisis.
Keywords REITs, Illiquidity, Asset pricing models, International real estate returns, Post-GFC,
Risk adjusted performance
Paper type Research paper
1. Introduction
Our main objective in this study is to analyze and revisit the risk and performance of
publicly traded real estate companies from 14 countries over the period 2000–2015, marked
by the unprecedented Global Financial Crisis.
The move toward economic globalization which gathered pace in the early 1980s, most
noticeably with the opening up of the Chinese economy and its accession to the World Trade
Organization in 2001, has fundamentally altered real estate investing. As international
institutional investors broadened the scope of their investment strategies as a way to
diversify their commercial real estate holdings, new public markets and listed real estate
securities were becoming available for investment. From 2000 to 2016, the global market
capitalization of REITs has increased from $152bn to $1.6 trillion (including $170bn for
Europe and $303bn for Asia Pacific) while the number of non-US REITs increased from
96 to 540 (195 in Europe and 260 in Asia Pacific source: APREA).
Journal of Property Investment &
Finance
Vol. 37 No. 1, 2019
pp. 72-91
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-03-2018-0021
Received 31 March 2018
Revised 9 July 2018
6 September 2018
Accepted 10 September 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
JEL Classification —C19, C49, G12, G31
72
JPIF
37,1
Since, the spread of the REIT regime globally two decades ago, no event has been
more drastic for listed property markets than the Global Financial Crisis. Glascock and
Lu-Andrews (2015) identified that from October 1997 (Asian financial crisis) to August 2011
(downgrade of the US economy), 21 out of 28 extreme negative events affecting the US REIT
market took place during and after the Global Financial Crisis (i.e. from September 2008
to August 2011).
Analyzing factors affecting international securitized real estate returns is a well-established
field in the real estate literature. Starting in the late 1990s, researchers focused on exploring the
diversification benefits of listed real estate by identifying continental factors across Europe,
USA and Asia (Eichholtz et al., 1998), a world-wide factor in international real estate returns
and orthogonalized country-specific factors (Ling and Naranjo, 2002; Bond et al., 2003;
Hamelink and Hoesli, 2004).
Bond et al. (2003) were the first ones to explore whether market risks are related to
fundamental and economic risk factors by using indices from the European Public Real
Estate Association (EPRA). These EPRA indices are listed property securities and cover
both REITs and property companies (PC). They apply an international CAPM and factor
models based on Fama and French’s (1993) three-factor approach.
This literature on securitized real estate is part of the broader financial economics
literature. Since the seminal work of Levy and Sarnat (1970), Grubel (1968), Solnik (1974),
Stulz (1981) and Adler and Dumas (1983), international asset pricing has been extensively
researched. The starting point may be attributed to Solnik’s (1974) international capital
APM. This literature has been largely extended to include factors such as currency risks
and inflation risks in market equilibrium models (Adler and Dumas, 1983; Dumas and
Solnik, 1995; Vassalou, 2000 among many others). The time variation of the factor premiums
associated with these risks has also been documented (Ferson and Harvey, 1993; Dumas and
Solnik, 1995; Bekaert and Harvey, 1995; De Santis and Gerard, 1997). Fama and French
(1998) and Griffin (2002) have reported that domestic size and value factors capture most
explanatory power in a factor model, with little power added by international factors.
Furthermore, the literature covers the returns-generating process for international
commercial real estate returns. Researchers have focused on market risks (Liu and Mei,
1996; Eichholtz et al., 1998; Ling and Naranjo, 2002) as well as extra-market sources of risk,
such as global value, size and momentum factors, economic openness (e.g. Bond et al., 2003;
Hamelink and Hoesli, 2004; Bardhan et al., 2008).
This paper extends the work of Bond et al. (2003) to investigate the relative performance
of listed real estate before and after the GFC. To conduct the analysis, a sample of 14 listed
real estate markets proxied by country-level EPRA commercial real estate indexes are
scrutinized for global market risk and country-specific risk factors from 2000 to 2015, i.e.,
before, during and after the Global Financial Crisis.
The diversification benefits of international listed real estate around the time of the GFC
have been a topic of great interest in the academic literature. Most researchers choose to run
long-period analysis, by comparing and contrasting pre-GFC and post-GFC patterns in
listed real estate markets. For instance, Ryan (2011) explained that diversification
opportunities in 12 international developed and emerging listed property markets
evaporated during the GFC. Liow (2015) who investigated the risk-return convergence of
12 international developed public property markets (including REITs and non-REITs)
during the 1990–2011 period explains that risk and return characteristics of developed
public property markets have not become less different from each other over the period
under study while exchange rates have had little effect. Focusing on ten Asian listed
property markets (REITs and non-REITs), Liow (2016) assessed that post-GFC, Asian
markets have experienced increased co-movements with US financial markets, lessening
diversification opportunities for investors.
73
International
listed real
estate returns
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