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Non‐Normal Real Estate Return Distributions by Property Type in the UK

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  • Michael S. Young
  • Stephen L. Lee
  • Steven P. Devaney

Abstract

Investment risk models with infinite variance provide a better description of distributions of individual property returns in the IPD UK database over the period 1981 to 2003 than normally distributed risk models. This finding mirrors results in the US and Australia using identical methodology. Real estate investment risk is heteroskedastic, but the characteristic exponent of the investment risk function is constant across time -- yet it may vary by property type. Asset diversification is far less effective at reducing the impact of non‐systematic investment risk on real estate portfolios than in the case of assets with normally distributed investment risk. The results, therefore, indicate that multi‐risk factor portfolio allocation models based on measures of investment codependence from finite‐variance statistics are ineffective in the real estate context.

Suggested Citation

  • Michael S. Young & Stephen L. Lee & Steven P. Devaney, 2006. "Non‐Normal Real Estate Return Distributions by Property Type in the UK," Journal of Property Research, Taylor & Francis Journals, vol. 23(2), pages 109-133, March.
    • Handle: RePEc:taf:jpropr:v:23:y:2006:i:2:p:109-133
    DOI: 10.1080/09599910600800302
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    Cited by:

    1. Amen Aissi Harzallah & Mouna Boujelbene Abbes, 2020. "The Impact of Financial Crises on the Asset Allocation: Classical Theory Versus Behavioral Theory," Journal of Interdisciplinary Economics, , vol. 32(2), pages 218-236, July.
    2. Tamás Kiss & Hoang Nguyen & Pär Österholm, 2021. "Modelling Returns in US Housing Prices—You’re the One for Me, Fat Tails," JRFM, MDPI, vol. 14(11), pages 1-17, October.
    3. Zouheir Mighri & Raouf Jaziri, 2023. "Long-Memory, Asymmetry and Fat-Tailed GARCH Models in Value-at-Risk Estimation: Empirical Evidence from the Global Real Estate Markets," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 21(1), pages 41-97, March.
    4. Patrick Krieger & Carsten Lausberg & Kristin Wellner, 2018. "Einblicke in die Gründe für nicht-normalverteilte Immobilienrenditen: eine explorative Untersuchung deutscher Wohnimmobilienportfolios [Insights into the reasons for non-normal real estate returns:," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 4(1), pages 49-79, November.
    5. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy & Donald Keenan, 2015. "Cornish-Fisher Expansion for Commercial Real Estate Value at Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 50(4), pages 439-464, May.
    6. Ming-Chu Chiang & I-Chun Tsai, 2016. "Ripple effect and contagious effect in the US regional housing markets," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 55-82, January.
    7. Ming-Chu Chiang & I-Chun Tsai, 2016. "Ripple effect and contagious effect in the US regional housing markets," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 55-82, January.
    8. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy & Jean-Luc Prigent & Donald Keenan & Mahdi Mokrane, 2017. "Modified Sharpe Ratios in Real Estate Performance Measurement: Beyond the Standard Cornish Fisher Expansion," THEMA Working Papers 2017-20, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    9. Michael Young, 2008. "Revisiting Non-normal Real Estate Return Distributions by Property Type in the U.S," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 233-248, February.
    10. Carsten Lausberg & Stephen Lee & Moritz Müller & Cay Oertel & Tobias Schultheiß, 2020. "Risk measures for direct real estate investments with non-normal or unknown return distributions," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 6(1), pages 3-27, April.
    11. Chang, Kuang-Liang, 2010. "House price dynamics, conditional higher-order moments, and density forecasts," Economic Modelling, Elsevier, vol. 27(5), pages 1029-1039, September.

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