Risk and Return on Real Estate: Evidence from Equity Reits

30 Pages Posted: 28 Jun 2004 Last revised: 21 Jul 2010

See all articles by Kam C. Chan

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Anthony B. Sanders

George Mason University - School of Business

Date Written: March 1990

Abstract

We analyze monthly returns on an equally-weighted index of 18 to 23 equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973-87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs. Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60 percent of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.

Suggested Citation

Chan, Johnny and Hendershott, Patric H. and Sanders, Anthony Bown, Risk and Return on Real Estate: Evidence from Equity Reits (March 1990). NBER Working Paper No. w3311, Available at SSRN: https://ssrn.com/abstract=282681

Johnny Chan

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anthony Bown Sanders

George Mason University - School of Business ( email )

Fairfax, VA 22030
United States

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