Abstracts for Vol. 7, No. 1 of the Journal of Real Estate Portfolio Management

Returns and Risk on Real Estate and Other Investments: More Evidence

John D. Benjamin, G. Stacy Sirmans, and Emily N. Zietz

This study reviews the most recent findings on real estate returns, and organizes the reviews into five categories: (1) risk and returns; (2) diversification and portfolio optimization benefits; (3) returns on real estate versus other investments; (4) REITs; and (5) inflation and real estate returns. An annotation of each study is provided and current findings are compared
to those of previous studies.
Real estate research is broadening to include topics such as market efficiency, REITs and the power of macroeconomic variables in explaining and predicting real estate returns. Discussed are findings on whether real estate provides diversification benefits, real estate returns versus other investments, REIT return performance and real estate as an inflation hedge.

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The Real Estate Asset Allocation Decision: Monetary Policy Implications

Gerald W. Buetow, Jr., and Robert R. Johnson

Previous research establishes that Federal Reserve monetary policy influences both stock and bond returns. This research extends past research and shows that similar patterns exist for real estate investment trust returns. We find that the correlation structure of asset returns changes with alternative monetary policy environments. Mean-variance analysis indicates that optimal asset allocations differ dramatically in different monetary policy environments, and that the exposure to real estate should be prominent only in expansive environments. Overall, the findings suggest that investors may wish to realign their portfolios in reaction to, or anticipation of, Federal Reserve actions.

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Comparing Downside-Risk and Mean-Variance Analysis Using Bootstrap
Simulation

Ping Cheng

Is Downside risk (DR) a better alternative to the traditional mean-variance analysis (MV) for real estate portfolio diversification? This study demonstrates a bootstrap approach for comparing the two models. The results show that ex ante DR portfolio return distributions tend to be negatively skewed with a smaller left tail, and median returns seem to be higher than that of MV portfolios. Also, the DR model suggests the weight of real estate in a mixed-asset portfolio is similar to the practice of institutional investors. The results imply that portfolios formed with DR approach have certain desirable properties unavailable to MV portfolios.

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Pricing Effects of Seasoned Debt Issues of Equity REITs

Chinmoy Ghosh, Raja Nag, and C. F. Sirmans

Real estate investment trusts (REITs) have been one of the most active sectors in the capital market over the last few years. This study examines the equity valuation effects of seasoned debt offers by REITs during the 1991–1997 period. REITs raised more than $35 billion through debt issues during this period. The findings indicate a positive significant reaction to announcements of debt offers. Although the results are inconsistent with traditional finance literature, it corroborates Howe and Shilling’s (1988) findings for a smaller sample of 73 REITs. Further, the price changes are found to be significant and positively related to the amount of debt issued and significant and negatively related to the apartment and mall property types.

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Are REIT CEOs Rewarded for Performance? Another Look

John L. Scott, Randy I. Anderson, and Anthony L. Loviscek

Researchers have found that firm size is more important than firm performance in determining the compensation of top managers of real estate investment trusts (REITs). In fact, some recent research excludes performance altogether as an explanatory variable in estimating compensation. This research reexamines this issue by using a market-based measure of performance and by segmenting compensation into total and incentive-based components. The results demonstrate that the rewards to performance dominate the rewards to size. This finding indicates that performance is a more important explanatory variable than prior research suggests.

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The Use of GIS & OLAP for Accurate Valuation of Developable Land

Bruce Weber

The purpose of this study is to describe a beginning best practice technique for the valuation of brownfields that incorporates business cycle as well as market analysis. The literature suggests that a developmental model that uses Monte Carlo methods to estimate land value as a residual, in light of all risks, is likely to be the most appropriate methodology. This study examines approaches to market analysis and illustrates how technology can provide more accurate results. It suggests a reference scope of work for market analysis. It is badly needed in order to communicate the level of market analysis that has been used in an appraisal for international valuation standards.
This article is the winner of the Real Estate Development manuscript prize (sponsored by the Urban Land Institute) presented at the American Real Estate Society Annual Meeting.

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Mature and Yet Imperfect: Real Estate Capital Market Arbitrage

Randy I. Anderson, and Youguo Liang

The familiar boom-and-bust pattern of the real estate market has been tempered recently by an increased amount of discipline administered by the capital markets, and by the debt markets in particular. Additionally, due to the emergence of the public REIT and CMBS markets in the 1990s, and the accompanying proliferation of data concerning not only property market
conditions but also capital flows and broader industry trends, the industry’s ability to detect property and capital market imbalances has greatly improved. While this is generally a positive for the industry, this informational efficiency has created an environment in which it has become increasingly difficult for real estate investors to obtain excess returns.

However, while real estate capital markets are much more competitive than they were a decade ago, they are still exceptionally fragmented due to the unique supply and demand characteristics of real estate properties, markets and real estate-related securities. This fragmentation or ‘‘market segmentation’’ leads to inefficiencies than can be exploited by investors desiring excess returns.
In this article, we examine the overall characteristics and trends of the real estate capital markets that have led to increases in efficiency. Subsequently, we explore the inefficiencies and segmentations that still remain in the market, and demonstrate how a general real estate investment
strategy can be enhanced by capitalizing on opportunities to arbitrage valuation discontinuities and inefficiencies between and within these segments.

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