Executive Summary. This paper looks at the growth in size of public capital markets around the world and analyzes the returns that have been achieved. Monthly data from Global Property Research (GPR) for periods 1984 through 2002 mid year is used for the study. The paper describes the number of firms and market capitalization found in 16 countries then examines the return correlations of the major real estate indices around the world along with their growth and performance. We conclude that while the reasonable returns and low correlations of most public real estate markets around the world should attract institutional investors, but the relatively small size of most markets has made them less attractive. The U.S. market cap is $170 billion; but all other markets are much smaller with France, Hong Kong, and Japan averaging around $40 billion being the next closest tier. Thus the public real estate markets around the world still have a long way to go and grow to attract significant institutional capital.
Access to capital is a major component of every real estate investment decision and access to public capital markets has been a major problem for capital hungry real estate investors since the beginning of time. However, the last decade of the 1900s bought a new era of access for real estate to the public capital markets around the world. This paper looks at the growth in size of public capital markets around the world and analyzes the returns that have been achieved. We examine the growth and performance of public market real estate in an international context using monthly data from Global Property Research (GPR) for periods 1984 through 2002 midyear. With the poor performance of the general equity markets around the globe and the lowest interest rates in 50 years, many investors have decided to add to their real estate allocation in both private and public form investments. Another reason for investors to consider real estate is that there has been an increasing correlation between international stock and bond market return indices, causing investors to look for additional portfolio diversifiers. This paper also examines the return correlations of the major real estate indices around the world along with their growth and performance.
II. LITERATURE REVIEW
There is a vast literature that has examined the size, growth, and performance of the international debt and equity markets. Beginning with the seminal work of Solnik (1974), practitioners and academics have espoused international investing due to the low correlation in returns across countries, providing diversification opportunities. However, recent studies have suggested that due to the increasingly global, open economy, the cross listing of securities, and the rapidly advancing technology that international debt and equity markets are becoming more correlated, thus reducing the benefits of international diversification (Conover, Friday, and Sirmans, 2002).
On the domestic side, there are numerous studies that have examined the size, growth and performance of both public and private real estate investments. Like international debt and equity, real estate allocations have been advocated due to their low correlation with domestic stock and bond returns (Conner, Hess, and Liang, 2001). With the recent downturn in the general equities market, the increasing correlation of international stocks and bonds, and the relatively strong performance of real estate, investors are becoming increasingly interested in international real estate. However, there are very few studies that have examined the international real estate markets. Stevenson (2000) points out that few studies exist because there is relatively little data and the data that does exist is only for a limited number of countries.
In general, most of the international real estate studies that have been completed have tried to determine if international real estate investing provides diversification benefits. …