understand the behavior of securitized and direct real estate and sheds light on issues such as
price discovery and inflation hedging.
Based on the estimated vector autoregressive models, the REIT returns lead direct real
estate returns even when catering for the property type and regardless of the property sector.
This indicates that the previously found lead-lag relations are not due to factors such as
appraisal smoothing or the differing property-type mixes between securitized and direct real
estate indices. Therefore, the direct market appears to be less informationally efficient than
the REIT market (Barkham and Geltner, 1995, pp. 39-42, provide a detailed discussion on
why these kinds of findings can be assumed to give implications regarding informational
efficiency). Interestingly, the inclusion of fundamentals in the models only slightly increases
the adjusted coefficient of determination for TBI returns and in all the sectors REIT returns
remain significant in the equation for TBI returns even after the inclusion of fundamentals in
the models. This emphasizes the predictive power of REIT returns with respect to TBI
returns.
In line with prior expectations, the estimated impulse responses suggest that direct real
estate prices adjust more slowly than REIT prices to shocks in the fundamentals. Moreover,
TBI returns appear to react to unexpected changes in REIT returns with a lag, i.e., the
information that is revealed by movements in REIT prices is only sluggishly absorbed by the
direct market prices. Nevertheless, the analysis reveals that there are predictable components
in REIT returns as well. In particular, it appears that changes either in the economic
sentiment or in the default risk premium contain some predictive power with respect to REIT
returns.
We also investigate whether the demand for direct real estate reacts more rapidly to
shocks than prices do. It can be argued that if demand changes were to lead TBI returns and
did not lag REIT returns, the observed lead-lag relationship between REIT and TBI returns
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