Characteristics of German Real Estate Return Distributions: Evidence from Germany and Comparison to the U.S. and U.K
Maurer, Raimond, Reiner, Frank, Sebastian, Steffen, Journal of Real Estate Portfolio Management
Executive Summary. In contrast to the United States and the United Kingdom, little empirical work exists about the distributional characteristics of appraisalbased real estate returns outside these countries. The purpose of this study is to fill this gap by focusing on Germany. In line with other studies, this paper offers an extensive investigation into the distribution of German real estate returns and compares them with and U.S. and U.K. data in the same period. Furthermore, the comovements with bonds and stocks are also examined. In the core, the distributional characteristics for German real estate are comparable to that for the U.S. and U.K.
As empirical research suggests, the characteristics of real estate return distributions are significantly different from those of financial assets, like bonds and stocks (e.g., Sirmans and Sirmans, 1987; Fletcher, 1995; Norman, Sirmans and Benjamin, 1995: Stevenson, 2000; and Benjamin, Sirmans and Zietz, 2001). In general, real estate is seen as an investment vehicle providing a low return variability and downside risk with respect to certain target returns. For example, there is a general belief that real estate is an effective vehicle to protect investors from the risk of inflationary erosion, which is particularly important for long-term pension investments. In addition, there is a clear consensus in the literature that real estate returns exhibit low co-movement and a counter-cyclical performance with bond and stock markets. Furthermore, as Newell and Webb (1996) pointed out, real estate returns exhibit significant positive serial correlation, which is in marked contrast to the generally insignificant autocorrelation structure in the stock and bond markets. Due to these specific risk and return characteristics, property investments were shown to be beneficial in reducing the risk, as well as in diversifying international mixedasset portfolios.
Most of the empirical work towards the estimation of the return generating process of real estate investments has focused on analyzing time series of return indices for the United States and the United Kingdom. In particular, the indices developed by the National Council of Real Estate Investment Fiduciaries (NCREIF) for the U.S., and by the Investment Property Databank (IPD) for the U.K. are used extensively throughout the literature. Both types of indices are constructed by aggregating the return of individual incomeproducing commercial properties held by institutional investors, such as mutual funds, insurance companies and pension funds. To estimate the capital gains portion of the total return, it is common practice to use appraisal values for individual properties. There is a general belief in the literature that using appraised values in conjunction with, and in aggregation across, a number of properties to construct an index may lead to a smoothing effect, which understates the volatility of the underlying true process of real estate returns (see, among others, Ross and Zisler, 1991; Geltner, 1989, 1993; and Brown and Matysiak, 2000).
In contrast to the U.S. and the U.K., there is comparatively little empirical work on the distributional characteristics of real estate returns outside these countries. This is mainly due to the poor availability of adequate time series. The purpose of this study is to fill this gap by focusing the characteristics of real estate return distributions for Germany. In line with other studies concerning the characteristics of appraisal-based real estate return distributions (e.g., Myer and Webb, 1994; Young, 1994; Young and Graff, 1995; and Graff, Harrington and Young, 1997), this study conduced a rigorous and extensive investigation into the distribution of German commercial real estate returns and compared them with U.K. and U.S. data over the same period. Furthermore, the comovements with return series of financial assets (i.e., bonds and stocks) have also been examined. …