A Comparative Anatomy of Residential REITs and Private Real Estate Markets: Returns, Risks and Distributional Characteristics
Real Estate Investment Trusts (REITs) are the only truly liquid assets related to residential real estate investments. We study the behavior of U.S. Residential REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about 0.58. Decomposing their covariances into principal components reveals several strong factors. Residential REIT characteristics differ to some extent from those of the S&P/Case‐Shiller (SCS) private real estate markets. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in residential real estate is far more risky than what might be inferred from the widely followed SCS series. Although the SCS and REITs indicate little support for being able to predict each other, there is strong evidence of self‐predictability for the series.
© 2014 American Real Estate and Urban Economics Association. Version of Record online: 02 June 2014. Issue Online: 16 February 2015. Funding Information: Ziman Center for Real Estate at UCLA for providing REIT data and for a research Science Foundation Ireland. Grant Number: 08/SRC/FM1389