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What factors determine real estate security returns?

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  • Hamelink, F.

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Hoesli, M.

Abstract

In this paper, we use constrained cross-section regressions to disentangle the effects of various factors on real estate security returns in 21 countries. A better knowledge of the risk factors driving real estate returns is crucial, whether a pure real estate portfolio is constructed, or whether real estate is considered as an alternative asset class within the traditional stock portfolio. Besides a common factor, 'pure' country, size, and value/growth factors are considered. The value/growth measure that is used in this paper is a unique indicator developed by Salomon Smith Barney (SSB). It provides for each stock the relative importance of the value and growth components, rather than using a binary classification. The value/growth factor is found to have a substantial and increasing effect on returns over the analyzed period February 1990 - April 2002. Country factors are important determinants of real estate security returns also. Statistical analysis of the residuals indicates that additional 'hidden' factors most likely exist. These statistical factors are shown to explain about one third of specific returns on intemational real estate securities. Nevertheless, as is the case for traditional stock portfolios, stock picking keeps all its importance for real estate stocks as well.

Suggested Citation

  • Hamelink, F. & Hoesli, M., 2002. "What factors determine real estate security returns?," Serie Research Memoranda 0017, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    • Handle: RePEc:vua:wpaper:2002-17
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Foort HAMELINK, & Hélène HARASTY & Pierre HILLION, 2001. "Country, Sector or Style: What Matters Most When Constructing Global Equity Portfolios? An Empirical Investigation from 1990-2001," FAME Research Paper Series rp35, International Center for Financial Asset Management and Engineering.
    3. Ling, David C & Naranjo, Andy, 2002. "Commercial Real Estate Return Performance: A Cross-Country Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 119-142, Jan.-Marc.
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    Cited by:

    1. John Glascock & Lynne Kelly, 2007. "The Relative Effect of Property Type and Country Factors in Reduction of Risk of Internationally Diversified Real Estate Portfolios," The Journal of Real Estate Finance and Economics, Springer, vol. 34(3), pages 369-384, April.
    2. Elaine Worzala & C.F. Sirmans, 2003. "Investing in International Real Estate Stocks: A Review of the Literature," Urban Studies, Urban Studies Journal Limited, vol. 40(5-6), pages 1115-1149, May.

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