thereby the direct market liquidity is time-varying. This is particularly prominent in the
apartment market and can be seen to a somewhat lesser extent in the other markets as well.
7 Summary and Conclusions
Due to the better liquidity, greater number of market participants, smaller transaction costs
and the existence of a public market place in the securitized market, it is expected that the
prices of securitized real estate investments react faster than the price of direct real estate to
shocks in the fundamentals. Previous empirical evidence supports this hypothesis. However,
the previous studies are generally based on data in which the property-type mixes differ
between the securitized and direct real estate portfolios, and the studies that cater for the
property mix include notable complications. Since the reaction speeds and magnitudes to
shocks may vary between real estate sectors, the empirical evidence regarding the lead-lag
relations is not conclusive.
To avoid the property-type complication, we employ sector level REIT (NAREIT) and
direct real estate (TBI) data over the period 1994-2009 to examine the dynamics and reaction
speeds between and of the securitized and direct real estate markets in the U.S. Furthermore,
we restate the NAREIT returns for the effect of leverage. Four sectors (apartments, industrial
property, offices and retail property) are included in the analysis. To the best of our
knowledge, this article is the first one to concentrate on studying rigorously the dynamics
between the securitized and direct real estate returns using sector level data that do not exhibit
appraisal smoothing. Moreover, this appears to be the first study that compares the reaction
speed of securitized and direct real estate returns to shocks in the fundamentals based on
impulse responses derived from an econometric model. In addition to examining the lead-lag
relations between the securitized and direct real estate markets, our analysis helps to
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