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

would be due to the sluggish adjustment of sellers’ reservation prices. However, we do not
find notable differences between the reaction speeds of demand and prices in the direct
market and REIT returns appear to lead changes in the direct market demand. Therefore, the
results suggest that the perceived lead-lag relations between the securitized and direct real
estate returns are not only due to the slow reaction of sellers, but also due to the sluggish
adjustment of the demand side in the direct real estate market.

Although the main findings are similar concerning all four sectors, the results also
show that there are some differences between the sectors regarding the return dynamics.
Therefore, it is reasonable to use sector level data when evaluating the return and price
dynamics in the REIT and direct property markets and when making forecasts concerning
future price developments in the markets. The aggregated data may mask valuable sector
specific information.

In addition to the predictability of real estate returns, the findings have portfolio
implications. The found positive lead-lag relations indicate that over the longer horizon the
co-movement between REIT returns and direct real estate returns is notably stronger than the
contemporaneous quarterly correlation coefficients suggest. Indeed, the average annual
correlation between the sector level (unlevered) real NAREIT and TBI returns is 0.67, while
the corresponding quarterly figure is as low as 0.23. Moreover, based on the model dynamics,
the hypothesis that both direct and securitized real estate investments work as a hedge against
unexpected changes in the inflation rate cannot be rejected.

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