Academic journal article Journal of Real Estate Portfolio Management

The Relationship between Size and Return for Foreign Real Estate Investments

Academic journal article Journal of Real Estate Portfolio Management

The Relationship between Size and Return for Foreign Real Estate Investments

Article excerpt

Executive Summary. In this study, we utilize a relatively new database to examine whether small foreign real estate firms have higher returns than large foreign real estate firms. We examine this issue from the perspective of a U.S. investor who forms portfolios of international real estate firms on the basis of U.S. dollar market value of equity. Using eleven years of foreign real estate data for more than 1200 observations in twenty countries, we find that large firms have higher returns and lower risk than small firms. These results hold when returns are denominated in either local currency or dollars. Further, the relationship between firm size and return is monotonic across portfolio groupings.

INTRODUCTION

Previous research has documented a small-- firm effect for U.S. stocks. Small U.S. firms, that is those with low-market values of equity, have been shown to outperform large capitalization firms by Banz (1981), Fama and French (1992, 1995) and Kothari, Shanken and Sloan (1995). The small-firm effect has been shown to exist for international stocks by Sinquefield (1996) who finds diversification benefits when the investor concentrates on small-firm stocks overseas.

The small-firm effect has also been documented for U.S. Real Estate Investment Trusts (REITs) by McIntosh, Liang and Tompkins (1991). Using data from 1974-88, they find that small capitalization REITs have higher returns than large capitalization REITs without an accompanying increase in risk. Further, the superior performance of small REITs does not appear to be due to performance mismeasurement related to infrequent trading or transactions costs. Though the returns to international real estate firms have been documented by Sweeney (1989), Giliberto (1990), Liu and Mei (1993), and Eichholtz (1996), there is a lack of evidence as to whether small foreign real estate firms outperform large real estate firms.

In this study, we utilize a relatively new database to examine whether small foreign real estate firms have higher returns than large foreign real estate firms. We examine this issue from the perspective of a U.S. investor who forms portfolios of international real estate firms on the basis of dollar market value of equity. The returns are measured in both dollars and local currency for firms in over twenty foreign countries in eleven different years. Interestingly, the returns for small firms are less than those for large firms. Further, the returns for large foreign real estate firms are less risky than those for small firms. These results hold when returns are denominated in either local currency or dollars.

This study is organized as follows. The next section discusses the data and methodology used. The third section discusses the results and the final section provides concluding remarks.

DATA AND METHODOLOGY

We utilize Standard and Poor's Global Vantage database to measure the returns from foreign, publicly traded firms whose primary business is real estate. The database provides the monthly stock prices, dividends and split information necessary for return calculations. The period of return data examined is from January 1985 to June 1996. We calculate both dollar- and local foreign currency-- denominated returns since we examine the risk and return profile of international investments from a U.S. perspective and wish to examine the risk from exchange-rate changes separately. Exchange-rate data are available from the Federal Reserve of Chicago's worldwide web site. We include Canada and all the countries in Morgan Stanley's EAFE index with available data.

The Global Vantage database also provides price and share information necessary for identifying small and large firms as well as SIC codes necessary for industry identification. Firms must be classified in the two-digit SIC code 65 (Real Estate) to be considered for inclusion in this study.1 A summary of the observations and firms in each SIC code is presented in Exhibit 1. …

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