The real alternative? A comparison of German real estate returns with bonds and stocks

Published date05 February 2018
DOIhttps://doi.org/10.1108/JPIF-02-2017-0012
Pages19-31
Date05 February 2018
AuthorNikodem Szumilo,Thomas Wiegelmann,Edyta Łaszkiewicz,Michal Bernard Pietrzak,Adam P. Balcerzak
Subject MatterProperty management & built environment,Real estate & property,Property valuation & finance
The real alternative? A
comparison of German real estate
returns with bonds and stocks
Nikodem Szumilo
Department of Land Economy, University of Cambridge, Cambridge, UK
Thomas Wiegelmann
Faculty of Society and Design, Bond University, Robina, Australia
Edyta Łaszkiewicz
Faculty of Economics and Sociology, University of Lodzki, Lodz, Poland
Michal Bernard Pietrzak
Department of Econometrics and Statistics,
Uniwersytet Mikolaja Kopernika, Torun, Poland, and
Adam P. Balcerzak
Department of Economics, Uniwersytet Mikolaja Kopernika, Torun, Poland
Abstract
Purpose The purpose of this paper is to evaluate how real estate returns behaved over the last two decades
in relation to the other two asset types. This allows a direct evaluation of how investors make allocation
choices and perceive risks and rewards offered by properties in the context of changing market conditions.
Design/methodology/approach A de-smoothed MSCI index is used to reflect direct property returns and
control for both income and capital returns within it. Indirect property returns are approximated by the RX
Real Estate index. By supplementing this data with an analysis of trends in both space and capital markets it
is possible to relate investor behavior to events affecting other assets.
Findings It is possible to identify three distinctive periods characterized by different correlation of returns
and behavior of investors: before the crisis of 2008, the crisis period between 2008 and 2012 and recovery
afterwards. These appear to have corresponded to different stages of the economic cycle. Interestingly,
performance of asset classes has also differed over that period suggesting that at different points in the cycle
asset allocation decisions may have been made differently.
Practical implications It appears that as investments over the last 15 years real assets in Germany
behaved similarly to bonds. It is possible that this phenomenon was driven by an aversion to the stock market
and its associated risk which became a concern after the financial crisis of 2008. Over the downturn that
followed the market shock investors appear to have turned to assets with simpler risk profiles like direct real
estate and government debt. On the other hand, the correlation between direct property investment index and
stock returns has been found to be small but negative. This shows not only that the two asset classes were
often driven by different factors but also suggests that diversification was, at least theoretically, possible.
Originality/value Direct real estate investment returns have repeatedly been found to exhibit
characteristics similar to those found in bond as well as equity markets (Eichholtz and Hartzell, 1996; Clayton
and MacKinnon, 2003) but little research examines the correlation between returns offered by those asset
classes in a mature financial and property market. In addition, the recent financial crisis provided a
dynamically changing investment which is ideal for investigating structural relationships between assets.
Keywords Risk, Diversification, Asset allocation, Property investment, Portfolio optimization,
Asset class correlations
Paper type Research paper
1. Introduction
The financial crisis of 2008 had a profound impact on all areas of finance. In fact, there have
been suggestions that its influence on the market may have been so significant that many
traditional investment strategies were altered which resulted in structural changes in how
investments are made (Boz and Mendoza, 2014). Although it is too early to draw conclusions
Journal of Property Investment &
Finance
Vol. 36 No. 1, 2018
pp. 19-31
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-02-2017-0012
Received 10 February 2017
Revised 12 April 2017
Accepted 18 April 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
19
Comparison of
German real
estate returns

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