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

Elias Oikarinen,Martin Hoesli and Camilo Serrano
Response speeds of direct and securitized real
estate to shocks in the fundamentals

Aboa Centre for Economics

Discussion Paper No. 60
October 2010

ABSTRACT

This paper contributes to the literature by identifying the response
patterns of direct and indirect real estate returns to shocks in the
market fundamentals. The response speeds are estimated with
vector autoregressive models using TBI and NAREIT returns for
the period 1994-2009 in the United States. To avoid the potential
influence of different property mixes and of leverage on the
dynamics, we use sector level data and deleveraged NAREIT
returns. The findings indicate that REIT returns lead direct real
estate returns even when catering for the property type and for
leverage. Our estimations suggest that this lead-lag relationship is
due to the sluggish reaction of direct real estate prices to
unexpected changes both in the fundamentals and in REIT prices.
The findings further suggest that the perceived lead-lag relations
are not only due to the slow adjustment of sellers’ reservation
prices, but also due to the sluggish reaction of demand in the
direct real estate market.

JEL Classification: G14; C32

Keywords: Vector Autoregressive Models, Generalized Impulse
Response Functions, Direct Real Estate, Securitized Real Estate,
Dynamics

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