A Fundamental Examination of Securitized and Unsecuritized Real Estate

Abstract

Most studies (including this one) have found a weak statistical relationship between total returns for securitized and unsecuritized real estate equities. Some studies argue that REIT shares behave more like the stock market, than real estate. In an attempt to focus this discussion, this study examines the fundamental underlying return-generating components: dividends, investment values, and dividend yields using NAREIT and NCREIF data from 1978 through 1994. While dividends have been part of the REIT pricing calculus for some time, relatively few studies have focused upon the "dividends" paid by NCREIF properties. The short-run relationships between these fundamental components are weak and many of their distributions display significant non-normal tendencies. Even when quarterly lags of up to two years are examined, these distributions also tend to be weakly correlated with one another. Of the three fundamental components, the long-run path of prices exhibited the strongest relationship. Interestingly, the volatility of the NCREIF dividend series is approximately 150% of the NAREIT volatility, while the volatility of the NCREIF asset values is roughly 25% of the NAREIT volatility. This is contradictory: in a simplified setting, greater dividend volatility should be accompanied by greater price volatility, not less, as observed here. Nevertheless, such comparisons suffer due to the incompatibility of the data sources and, accordingly, this study should be viewed as a preliminary examination of securitized and unsecuritized real estate returns.