Factor Analysis for Real Estate

15 Pages Posted: 4 Oct 2012

See all articles by Felix Schlumpf

Felix Schlumpf

Zurich Insurance Company Ltd

Genene Tessera

Zurich Insurance Company Ltd

Date Written: August 27, 2010

Abstract

The benchmarks for direct investments in real estate are mostly appraisal-based. They are usually smoothed. Therefore they are lagging the "true" returns in the property markets and understate their volatility and their correlation to other asset classes.

The basic idea in our approach is to use data on indirect real estate (REITs), determine their factor exposures to other asset classes and deliver the exposures according to the leverage in the REITs. As an application we use this model for asset allocation.

Our model shows that direct real estate has low interest rate sensitivity (duration of 2 to 7 depending on the country) and high correlation to equities and credit exposure. These properties are important for risk management which is simple to implement in any risk management system using factor exposures.

Suggested Citation

Schlumpf, Felix and Tessera, Genene, Factor Analysis for Real Estate (August 27, 2010). Available at SSRN: https://ssrn.com/abstract=2156218 or http://dx.doi.org/10.2139/ssrn.2156218

Felix Schlumpf (Contact Author)

Zurich Insurance Company Ltd ( email )

Mythenquai 2
Zurich, CH-8022
Switzerland

HOME PAGE: http://www.zurich.com

Genene Tessera

Zurich Insurance Company Ltd ( email )

Mythenquai 2
Zurich CH-8022
Switzerland

HOME PAGE: http://www.zurich.com/

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