Local Beta: Have Location Risks Been Priced in REIT Returns?

Cambridge Real Estate Research Centre WP 2020-02

40 Pages Posted: 15 Mar 2021

See all articles by Bing Zhu

Bing Zhu

Technische Universität München (TUM)

Colin Lizieri

University of Cambridge - Department of Land Economy

Date Written: January 31, 2020

Abstract

This paper studies the pricing of the risk associated with the location of the assets. The location risk is measured by ‘local beta’, which combines the systematic risk of local property markets and the property allocation strategy of real estate firms. The empirical results confirm a higher equity return for a firm with higher exposure to the most volatile property markets, particularly for REITs which are more geographically concentrated. For REITs with highly diversified assets, location risks are reflected in REIT returns. For those REITs with most concentrated assets, a one standard deviation increase in the local beta will lead to a 4.5% increase in the annual return. Investors can use REITs’ location risk as an information tool to construct a long-short investment portfolio of real estate firms and can achieve a significant non-market performance of 6% per annum.

Keywords: geographic asset location, real estate returns, location risks, diversification

JEL Classification: G12, R3

Suggested Citation

Zhu, Bing and Lizieri, Colin M., Local Beta: Have Location Risks Been Priced in REIT Returns? (January 31, 2020). Cambridge Real Estate Research Centre WP 2020-02, Available at SSRN: https://ssrn.com/abstract=3772717 or http://dx.doi.org/10.2139/ssrn.3772717

Bing Zhu

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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

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