Do Public Real Estate Returns Really Lead Private Returns?

Abstract

We use sector level REIT and transaction-based direct real estate data for the U.S. to provide a clearer understanding of the dynamic relations between public and private real estate returns. We exclude leverage from REIT returns to make the REIT data more comparable with the direct market data. We also include economic fundamentals in the analysis to take account of the influence of fundamentals on real estate market dynamics. Moreover, we consider the influence of the ‘escrow lag’ in the recording of private market prices. Even when catering for those factors, the generalized impulse responses from estimated vector error-correction models provide evidence of REIT returns leading private returns in the office, retail, and apartment sectors, but not in the industrial sector. These lead-lag relations are due to the slow reaction of private market returns to shocks in REIT returns and also in the risk premium and economic sentiment. The lead-lag relations remain even when the constant-liquidity direct market index is used instead of the conventional index.

Keywords: Direct Real Estate; Securitized Real Estate; REITs; Vector Error-Correction Models; Generalized Impulse Response Function; Dynamics; Escrow Lag

JEL Classification: G14, C32