1 Introduction
The securitized real estate market is generally assumed to be more informationally efficient
than the direct real estate market. This is due to the better liquidity, greater number of market
participants, smaller transaction costs and the existence of a public market place for real estate
securities. Therefore, the price of securitized real estate investments are expected to react
faster to shocks in the fundamentals than direct real estate prices. In line with this hypothesis,
empirical evidence suggests that the public market leads the direct real estate market even
when transaction-based data, i.e. data that do not exhibit appraisal smoothing, are used
(Barkham and Geltner, 1995; Oikarinen et al., 2010).
However, since the reported lead-lag relations are generally based on data that do not
correct for the different property-type mixes of the securitized and direct real estate indices,
the empirical evidence is not conclusive. As the price reaction speeds may substantially differ
between real estate sectors (Wheaton, 1999), it has been claimed that the perceived lead-lag
relations may be caused by the property-mix differences in the data used in the analyses.
Geltner and Kluger (1998), Seiler et al. (1999), and Li et al. (2009) find that REIT returns
lead NCREIF returns even when catering for the property-type mix. However, while Geltner
and Kluger limit their analysis to simple correlation analysis and do not study the
phenomenon in detail, Seiler et al. and Li et al. use the NCREIF data that exhibit appraisal
smoothing to proxy for the direct market performance. To date, no study has concentrated on
examining the reaction speeds of and the lead-lag relationships between the securitized and
direct real estate markets using sector level data and non-appraisal based direct real estate
returns.
We use sector level REIT (NAREIT) and direct real estate (TBI) total return data from
1994Q1 to 2009Q4 to study the reaction patterns of securitized and direct real estate returns to
economic shocks and to examine the lead-lag relations between the securitized and direct real