Working Paper: NBER ID: w3311
Authors: KC Chan; Patric H. Hendershott; Anthony B. Sanders
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.
Keywords: Equity REITs; Real Estate; Macroeconomic Factors; Risk-Adjusted Returns
JEL Codes: G12; G31; R33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected inflation (E31) | equity REIT returns (G12) |
| changes in the risk structure (G32) | equity REIT returns (G12) |
| changes in the term structure (E43) | equity REIT returns (G12) |
| equity REIT returns (G12) | discount on closed-end stock funds (G23) |