Published January/February 2013
Finding Similarities in Public and Private Real Estate
Source: “Private and Public Real Estate: What Is the Link?” published in Journal of Alternative Investments, Winter 2012.
Authors: Dan Stefek and Raghu Suryanarayanan of MSCI
Synopsis: The pair investigated the relationship between returns on public and private real estate investments, and found that the two forms of real estate investment provide very similar return and risk patterns, especially over the longer investment horizons typical for institutional real estate investors. NAREIT staff have conducted very similar research and found qualitatively identical results, which are updated on a monthly basis.
“Private and public investments … provide exposure to the same property market, yet by conventional measures public and private investments offer surprisingly different return and risk profiles. The link between public and private real estate is obscured by the way private real estate returns are measured. Appraisal-based indices suffer from two well-known problems: they lag the market and they understate volatility. As a result, property index returns do not accurately capture true private real estate returns.
We demonstrate a strong link between the returns to public and private real estate by correcting for appraisal smoothing and for the lead-lag relationship between public and private returns. Moreover, the correlation between private and public returns strengthens as the investment horizon increases: the correlation between public and private returns grows rapidly at first as the horizon is extended, and then levels off to about 0.75 at the investment horizon of two years and beyond.”
Strong Credit Lines Increased REIT Liquidity, Even During the Liquidity Crisis
Source: “Evolution of Corporate Line of Credit Access and Use: Evidence from REITs,” published in Research Issues in Real Estate: Essays in Honor of James R. Webb, 2011.
Authors: Michael Highfield of Mississippi State University, Matthew Hill of the University of Mississippi, and Ko Wang of Baruch College
Synopsis: Three economists researched REIT credit lines over the period 1999 to 2009and found that REITs maintained precautionary liquidity by increasing access to, but not use of, lines of credit.
“Lines of credit provided by banks serve as liquidity insurance for firms in case of future adverse cash flow shocks. Further, credit lines can facilitate short-term investment until capital can be raised through longer-term sources such as bond and equity markets. By providing optional liquidity that serves as a substitute for cash, the credit lines reduce the opportunity and agency costs associated with corporate cash holdings.
The capital constraints faced by REITs make credit lines a vital source of financing for property acquisition. We find that REITs have substantially increased their liquidity via available lines over the period 1999 to 2009. Total lines available could support 17 percent of REIT net assets, whiles REITs retain substantial overall liquidity by using less than 40 percent of availability, even at the peak of the financial crisis in 2009. The results show that while available lines have increased substantially over the time period studied, relative use has declined. Implications of this trend are an overall improvement in industry liquidity for the period, increased monitoring by bank lenders, and a possible reduction in industry-related agency costs.”