Style Analysis in Real Estate Markets: Beyond the Sectors and Regions Dichotomy

27 Pages Posted: 13 Mar 2009 Last revised: 10 Apr 2015

See all articles by Franz Fuerst

Franz Fuerst

University of Cambridge - Department of Land Economy; University of Melbourne; City University of New York - Center for Urban Research

Gianluca Marcato

Henley Business School - University of Reading

Date Written: March 12, 2009

Abstract

While style analysis has been studied extensively in equity markets, applications of this valuable tool for measuring and benchmarking performance and risk in a real estate context are still relatively new. Previous studies in the real estate market have identified three investment categories (rather than styles): sectors, administrative regions and economic regions. However, the low explanatory power reveals the need to extend this analysis to other investment styles. In fact real estate investors set their strategies considering factors that may differ from those found relevant for other asset classes. Following our analysis of obstacles to transferring equity style analysis to real estate, we identify four main real estate investment styles and apply a multivariate model to randomly generated portfolios to test the significance of each style in explaining portfolio returns. Results show that the alpha performance is significantly reduced when we account for the new investment styles, with small vs. big properties being the dominant one. Secondly, we find that the probability of obtaining alpha performance is dependent upon the actual exposure of funds to style factors. Finally, we obtain that both alpha and systematic risk levels are linked to the actual characteristics of portfolios. Our overall results suggest that fund managers should use these (and possibly other) style factors to set benchmarks and to analyze portfolio returns.

Keywords: investment styles, commercial real estate, portfolio analysis, performance measurement

JEL Classification: C20, G1, G11, G12, R33

Suggested Citation

Fuerst, Franz and Marcato, Gianluca, Style Analysis in Real Estate Markets: Beyond the Sectors and Regions Dichotomy (March 12, 2009). Journal of Portfolio Management, Vol. 33, No. 5, 2009, Available at SSRN: https://ssrn.com/abstract=1358593 or http://dx.doi.org/10.2139/ssrn.1358593

Franz Fuerst

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/directory/dr-franz-fuerst

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

City University of New York - Center for Urban Research

CUNY The Graduate Center
New York, NY 10011
United States

Gianluca Marcato (Contact Author)

Henley Business School - University of Reading ( email )

Department of Real Estate & Planning
Reading, RG6 6UD
United Kingdom
+44 (0)118 3788178 (Phone)
+44 (0)118 3788172 (Fax)

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