Academic journal article Real Estate Economics

Twenty Years of the NCREIF Property Index

Academic journal article Real Estate Economics

Twenty Years of the NCREIF Property Index

Article excerpt

Joseph L. Pagliari Jr. [*]

Frederich Lieblich [**]

Mark Schaner [**]

James R. Webb [***]

This study overviews the performance of the NCREIF Property Index, by property type, over the twenty-year period ended in 1998. More exactly, performance is analyzed from the perspective of the fundamental sources of return: initial earnings yield, dividend payout ratios, earnings growth, shifts in capitalization rates and other (less significant) effects. (While this approach is here applied to private real estate equities, nothing precludes its application to a variety of other investment classes.) Our results indicate the fundamental sources that have contributed to the Index's considerable cross-sectional variation as well as its time-series variation. Therefore, this study should be viewed as a useful historical account for those interested in understanding the ex post return-generating process of the Index and its property-type components as well as those who wish to model the ex ante return-generating process for a variety of applications in both the equity and debt markets--regardless of whether the s ecurities are publicly or privately traded.

This study provides an overview of the performance of the NCREIF Property Index (NPI) over the twenty-year period ended in 1998. The NPI is the most widely quoted performance measure of institutionally held private real estate in the U.S. At the end of 1998, the NPI had a market value of nearly $65 billion. The passing of twenty years not only marks some measure of historical significance, but also captures at least one complete market cycle--an important element in judging the reliability of any historical return series to help frame expectations about future performance.

Our perspective will emphasize a fundamental analysis of the components of return: initial earnings and dividends, [1] growth in earnings and dividends and changes in capitalization rates. By fundamental analysis, we mean the underlying components of return which generate long-term returns--as contrasted with technical analysis--for example, see Malkiel (1990). By fundamental analysis, we mean neither a review of rental rates, occupancy levels and similar measurements sometimes referred to as real estate fundamentals [for example, see Geltner (1997)] nor priced risk factors (term structure of interest rates, unanticipated inflation, etc.) [for example, see Chan, Hendershott and Sanders (1990) and Ling and Naranjo (1988)]. This fundamental approach, applied to ex post data, can be helpful in formulating a variety of ex ante perspectives. Moreover, a better understanding of private real estate equities can lead to a richer appreciation of the appropriateness of the pricing multiples at which publicly held equit y REITs currently trade--for example, see Muldavin (1997) and Geltner (1999)--as well as the parameterization of a contingent-claims model to gauge the pricing of commercial mortgage loans ("whole loans") and commercial mortgage-backed securities (CMBs); see Childs, Ott and Riddiough (1996), Ciochetti and Vandell (1999) and Titman and Tourous (1989).

While the approach and methodology also can be applied to a variety of investment classes, [2] this study focuses on commercial real estate: The NPI reports returns back to 1978. However, the returns for 1978 (as well as some others) were "back-filled" (i.e., 1978's return was retroactively estimated). [3] Moreover, the R&D/office sector did not post returns until the second quarter of 1978. Additionally, the derivation of capitalization rates on a trailing-earnings basis (see Methodology) requires the loss of one annual period. Consequently, this study uses the twenty-year period beginning in 1979.

Because there is substantial variation within property-type classifications, the fundamental components of return are examined for the overall Index as well as the major property types [4] and presented in Table 1. …

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