What Does the Stock Market Tell Us About Real Estate Returns?

TLDR

The paper analyzes the risks and returns of different types of real‑estate‑related firms traded on the NYSE and AMEX. The study finds that lagged returns of real‑estate stocks predict appraisal‑based index returns, indicating that the stock market contains information later reflected in property appraisals, and that variations in risk and return across real‑estate firms are partly driven by their dependence on rental cash flows, highlighting heterogeneity among securitized real‑estate firms.

Abstract

This paper analyzes the risks and returns of different types of real estate‐related firms traded on the New York and American stock exchanges (NYSE and AMEX). We examine the relation between real estate stock portfolio returns and returns on a standard appraisal‐based index, and find that lagged values of traded real estate portfolio returns can predict returns on the appraisal‐based index after controlling for persistence in the appraisal series. The stock market reflects information about real estate markets that is later imbedded in infrequent property appraisals. Additional analysis suggests that the differences in the return and risk characteristics across different types of traded real estate firms can be explained in part by appealing to real estate market fundamentals relating to the degree of dependence of the real estate firm upon rental cash flows from existing buildings. These findings highlight the heterogeneity of securitized real estate‐related firms.