Commercial Real Estate Return Distributions: A Review of Literature and Empirical Evidence

University of Reading Working Paper No. 01/00

37 Pages Posted: 15 Jan 2001

See all articles by Colin Lizieri

Colin Lizieri

University of Cambridge - Department of Land Economy

Charles W.R. Ward

University of Reading

Date Written: January 2000

Abstract

This paper reviews the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

Keywords: Real estate, returns, distributions, normality, asset class

JEL Classification: G10, G12, G14, L85

Suggested Citation

Lizieri, Colin M. and Ward, Charles W.R., Commercial Real Estate Return Distributions: A Review of Literature and Empirical Evidence (January 2000). University of Reading Working Paper No. 01/00, Available at SSRN: https://ssrn.com/abstract=255746 or http://dx.doi.org/10.2139/ssrn.255746

Colin M. Lizieri (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/staff/profiles/clizieri.htm

Charles W.R. Ward

University of Reading ( email )

ICMA Centre,
Henley Business School
Reading, RG6 6AB
United Kingdom
T: +44 (0)118 378 8239 (Phone)

HOME PAGE: http://www.icmacentre.ac.uk/about_us/academic_staff/professor_charles_ward,

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