(TBI) indices. More sectors are not included in the TBI. The sector level data cover a period
from 1994Q1 to 2009Q4. All the real estate indices employed in the analysis are total return
indices.
While NAREIT includes the impact of leverage, the NCREIF indices consist of
unleveraged properties. The magnitude of leverage naturally affects the mean and volatility
of securitized real estate returns. Therefore, we restate the NAREIT returns for the effect of
leverage. Similar to Pagliari et al. (2005), the unlevered returns are computed using the
following formula that is based on the well-known proposition of Modigliani and Miller
(1958):
ruit = reit(1-LTVit) + rdtLTVit, (1)
where ruit = the unlevered REIT return of sector i in period t, reit = the return on equity of
sector i in period t, rdt = the cost of debt in period t and LTVit = the loan-to-value ratio of
sector i in period t. The cost of debt is proxied by the U.S. home mortgages contract interest
rate. The average leverage of REITs during the sample period is 48% in the apartment and
office sectors, 43% in the industrial property sector, and 51% in the retail property sector.
In addition to the real estate data, the analysis includes several variables that may
affect significantly real estate returns according to the theory and previous empirical evidence.
These variables concern economic growth (Ling and Naranjo, 1997; Payne, 2003; Ewing and
Payne, 2005), general price level (Chan et al., 1990; Ling and Naranjo, 1997; Payne, 2003;
Ewing and Payne, 2005), short-term interest rates and the term structure of interest rates
(Chan et al., 1990; Ling and Naranjo, 1997), the default risk premium (Chan et al., 1990;
Karolyi and Sanders, 1998) and the economic sentiment (Berkovec and Goodman, 1996). We
measure economic growth with the change in U.S. GDP. The economic sentiment, that gives