1. Real Estate & Planning: www.henley.ac.uk/rep www.henley.ac.uk/rep Steven Devaney (University of Reading), Qin Xiao (Hull University Business School) and Mark Clacy- Jones (Investment Property Databank) Listed and direct real estate investment: A European analysis

2. Real Estate & Planning: www.henley.ac.uk/rep Ongoing interest in risk and return of real estate – Investor and regulatory angles Interest in the relationship between different forms of real estate – Substitutes or complements in a portfolio context? Lots of academic and practice-based research, esp. US BUT most evidence relies on valuation based measures of direct real estate returns 2 Context for study

3. Real Estate & Planning: www.henley.ac.uk/rep Early literature suggests that listed real estate 1 – Was more volatile than direct real estate – Had a low correlation with the direct market – Movements led those in direct market series Second wave of studies confirmed long run links using co-integration 2 – Listed sector returns led direct market, but there may also be a feedback effect 1 – e.g. Gyourko & Keim (1992), Myer & Webb (1993), Fisher et al. (1994), Eichholtz & Hartzell (1996) 2 – e.g. Wang et al. (1997), Glascock et al. (2000), Tuluca et al. (2000) 3 Previous literature

4. Real Estate & Planning: www.henley.ac.uk/rep With growth in data availability, recent studies are – Extending the spatial scope of such research 3 – Using transaction based series for the direct market Oikarinen et al. (2011) and Hoesli & Oikarinen (2012) – Use TBIs for US real estate market – Confirm long run links between listed and direct RE – Find that listed sector still leads direct market – with predictability solely from one to other 3 – e.g. Hoesli & Serrano (2007), Yunus et al. (2010) 4 Recent literature

5. Real Estate & Planning: www.henley.ac.uk/rep Re-examines characteristics and relationships using – FTSE/EPRA NAREIT indices for listed real estate – IPD valuation based indices for direct real estate – IPD transaction-linked indices for direct market Six European real estate markets from c.2001 to 2011 Includes comparisons with some US series Paper: www.epra.com/research-and-indices/research/www.epra.com/research-and-indices/research/ 5 What this paper does

6. Real Estate & Planning: www.henley.ac.uk/rep

7. Based on sales recorded in IPD databanks. Two-step process involves 1 1. Model of price-valuation relationship 2 ln P i = β 0 + β 1 ln A i + ∑ δ j C i,j + ∑ λ k S i,k + ε i 2. Mass appraisal of held assets to create index Samples and weighting reflect institutional property market in each country 1 – See Fisher-Geltner-Pollakowski (2007), Devaney & Martinez Diaz (2011) 2 – P = price, A = appraisal, C = country dummies, S = sector dummies 7 Transaction linked indices

8. Real Estate & Planning: www.henley.ac.uk/rep Basic comparisons – Means, standard deviations, autocorrelations – Visual peaks and troughs – Cross-correlations – contemporaneous and lagged Formal time-series techniques – Spectral analysis – testing for frequency of cycles – Cross-spectral analysis – testing for shared cycles (coherence) and whether they are synchronised (phase) 8 Methods

9. Real Estate & Planning: www.henley.ac.uk/rep9 Indices – Netherlands Rtn σρ t, t-1 EBI0.411.50.06 TBI0.42.10.27 VBI0.31.10.68

10. Real Estate & Planning: www.henley.ac.uk/rep Timing of index peak EBITBIVBI France 2007.12008.12007.4 Germany 2006.4-- Netherlands 2007.12008.3 Sweden 2007.12008.22007.4 Switzerland 2007.1-- UK 2006.42007.32007.2 USA 2007.12007.22008.1 Less smooth, but not less lagged – why? Modelling, recording and sample selection influences

11. Real Estate & Planning: www.henley.ac.uk/rep11 Indices – Germany

12. Real Estate & Planning: www.henley.ac.uk/rep Possible cycles linked to: – Business cycle (4-5 years) – Property development cycle (8-10 years) – Larger urban development cycles (16-20 years +) BUT only 40-48 quarters of data for most direct real estate series Yet similarities between series could be detected Listed sector leads in marking out shared longer cycle 12 Spectral & cross-spectral results

13. Real Estate & Planning: www.henley.ac.uk/rep Cross-spectral results EBI leads TBI (quarters) France1.8 Germany2.1 Netherlands3.3 Sweden4.3 Switzerland1.5 UK0.6 USA2.0 13 Phase - all countries Coherence - France

14. Real Estate & Planning: www.henley.ac.uk/rep Different series, different countries, different periods… BUT similar story Listed sector returns lead direct market returns while long-run links are stronger In Europe, TLIs do not consistently lead VBIs – puzzle? Length of most TLIs and VBIs too short to be conclusive on cyclical behaviour BUT enhancements to length and construction of TLIs may be possible 14 Summary

15. Real Estate & Planning: www.henley.ac.uk/rep The research team thanks the European Public Real Estate Association (EPRA) for providing funding and data for this research The views expressed are those of the authors and not necessarily of their respective organisations Contact author: Dr Steven Devaney (s.devaney@reading.ac.uk) 15