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Local Beta: Has Local Real Estate Market Risk Been Priced in REIT Returns?

Author

Listed:
  • Bing Zhu

    (Technical University of Munich)

  • Colin Lizieri

    (University of Cambridge)

Abstract

This paper studies the pricing of the risk associated with the location of the assets. The local real estate market risk is measured by ‘local beta’, which combines the systematic risk of local property markets and the property allocation strategy of real estate firms. The empirical results confirm a higher equity return for a firm with higher exposure to the most volatile property markets, particularly for REITs which are more geographically concentrated. For REITs with highly diversified assets, local real estate risks are not reflected in REIT returns. For those REITs with most concentrated assets, a one standard deviation increase in the local beta will lead to a 4.7% increase in the annual return. Investors can use REITs’ local real estate risk as an information tool to construct a long-short investment portfolio of real estate firms and can achieve a significant non-market performance of 4.9% per annum.

Suggested Citation

  • Bing Zhu & Colin Lizieri, 2024. "Local Beta: Has Local Real Estate Market Risk Been Priced in REIT Returns?," The Journal of Real Estate Finance and Economics, Springer, vol. 69(4), pages 682-718, November.
    • Handle: RePEc:kap:jrefec:v:69:y:2024:i:4:d:10.1007_s11146-022-09890-4
    DOI: 10.1007/s11146-022-09890-4
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    More about this item

    Keywords

    Geographic asset location; Real estate returns; Local real estate risk; Diversification;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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