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.
*Published:
AREUEA: Journal of the American Real Estate & Urban Economics Association, Vol. 18, No. 4, pp. 431-452, (Winter 1990).
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