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Public Versus Private Real Estate Equities: A More Refined, Long‐Term Comparison
Author(s) -
Pagliari Joseph L.,
Scherer Kevin A.,
Monopoli Richard T.
Publication year - 2005
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1080-8620.2005.00115.x
Subject(s) - real estate , economics , financial economics , real estate investment trust , capitalization rate , portfolio , leverage (statistics) , market liquidity , investment performance , finance , actuarial science , return on investment , microeconomics , computer science , machine learning , production (economics)
In this article we compare public and private real estate equities. In so doing, we control for three of the main differences between these investment alternatives: property‐type mix, leverage and appraisal smoothing. With these two restated indices, we then run tests to determine in a statistical sense whether the restated means and volatilities of the two series were different from one another. The clear answer is that they were not. The results of the statistical tests combined with the fact that the average difference between the two (restated) return series has substantially narrowed (to approximately 60 basis points) in the more recent (1993–2001) period jointly suggest a seamless real estate market in which public‐ and private‐market vehicles display a long‐run synchronicity. This has important implications for portfolio management. First, public‐ and private‐market vehicles ought to be viewed as offering investors a risk/return continuum of real estate investment opportunities. Second, while the “platform” did not matter in terms of observed return characteristics, the platform may matter with regard to liquidity, governance, transparency, control, executive compensation and so forth; an apparent clientele effect hints at these issues being valued differently by large and small investors.