Commercial Real Estate Investment: Co-intergration and Portfolio Optimisation

The question if listed real estate constitutes a viable proxy for direct real estate investment is long-standing and actively debated. A number of studies (predominantly in the US) have explored the investment attributes and dynamics of listed real estate relative to direct markets with varying results and interpretations. This study builds upon previous EPRA research including that of Sebastian and Schatz (2009) to expand the knowledge base applying a cross-jurisdictional methodology framework comprising France, Germany, Netherlands, Sweden, UK, Pan-Europe, Australia and the US to extenuate the nature and role of the different forms of real estate investment mediums within the confines of a multi-asset investment portfolio. Correlation analysis of total return performance indicates that listed real estate is closely aligned with direct real estate performance across the majority of jurisdictions albeit with varying degrees of lagged relationship premised on listed leading the direct market by anything up to one year depending upon jurisdiction. Whilst the analysis did not identify any Granger Causality relationships between listed and direct across the jurisdictions, co-integration analysis suggest trend reverting pricing behaviour in the long-run between both direct and listed real estate markets. Optimal portfolio analysis serves to further demonstrate the crucial role of real estate within a multi-asset investment portfolio from a diversification perspective and in terms of enhancing portfolio performance over longer term investment horizons across key international investment markets. In terms of total returns performance the listed real estate sector as expected exhibits higher levels of volatility relative to direct investment. Nonetheless the listed real estate does exhibit superior levels of annualised returns vis-à-vis direct investment in a number of key markets over the long term raising connotations about the weightings allocation and role of direct and listed real estate within the confines of a multi-asset investment portfolio. The construction of a blended real estate investment portfolio comprising direct and listed real estate serves to demonstrate that whilst the respective investment medium are inherently different, they exhibit not just compatibility but complementarity within the confines of an investment portfolio. Indeed in an investment environment governed by a renewed and insatiable appetite for transparency and liquidity listed real estate has the capacity to act as a ‘liquidity buffer’ for investors seeking real estate premised performance attributes.