Response speeds of direct and securitized real estate to shocks in the fundamentals

a more forward looking measure of growth in economic activity, is captured by the University
of Michigan consumer sentiment index regarding the five year economic outlook. Changes in
the consumer price index (CPI) are used to track movements in the general price level, while
the three month T-bill rate and the spread between the 10-year government treasury bond
yield and the three month T-bill rate measure the short-term interest rates and the term
structure of interest rates, respectively. Finally, the spread between low-grade corporate bond
(Baa, Moody’s) and the 10-year government treasury bond yield is used as the measure of
default risk premium as suggested by Chen et al. (1986), Bernanke and Blinder (1992), and
Ewing (2001).

In the econometric analysis, we use only real indices regarding real estate returns and
GDP. The (unlevered) real estate indices and GDP are deflated using CPI to get the real
indices. Furthermore, the real estate and GDP indices are used in the natural log form. For
the short-term interest rate, we test both nominal and real (deflated by CPI) rates in the
estimated models. The interest rate choice of the final model is done with the Akaike
Information Criteria.

Table 1 presents some descriptive statistics regarding the unlevered apartment
(apt_tbi, apt_reit), industrial property (ind_tbi, ind_reit), office (of_tbi, of_reit) and retail
property (re_tbi, re_reit) total returns. The volatilities between the unlevered REIT returns
and TBI returns do not notably differ from each other at the quarterly level. However, the
table shows that the TBI returns were substantially greater during the period than the
unlevered REIT returns regardless of the property sector. Also, Figure 1 illustrates that direct
real estate has substantially outperformed REITs during the sample period. This does not
necessarily imply that, once the leverage is taken into account, TBI returns are expected to
outperform REIT returns. Rather, the notable difference between the reported TBI and REIT
returns is most likely explained by the unusual sample period. According to Oikarinen et al.

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