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Public vs Private Real Estate
Transcript of Public vs Private Real Estate
David C. Ling and Andy Naranjo
Public vs Private Definitions
Publicly traded real estate investment trusts (REITs)
Private real estate
Goal of the paper
core property type: Multifamily, office, industrial, retail
Compare REIT portfolio to unlevered private market benchmark
remove the effect of financial leverage from REIT returns
exclude from the final analysis those REIT that not invest in core property type
use the same time varying property type weights as found in the benchmark of private market index each quarter when creating the aggregate REIT portfolio index
adjust downward the returns on our benchmark of private market portfolios to reflect the fact that returns are reported gross of asset management fees, whereas REIT returns are reported net of all firm level management fees
2. Private Benchmark
TBI measures quarterly returns on private properties in the NCREIF database
1994Q1 for all core properties
3. Public Benchmark
database (quarterly returns)
Unconditional Results: Public vs Private Market Returns
The Dynamic Relation between Public and Private Market Real Estate Returns
Empirical Methodology: VAR Models
The unconditional approach:
- Adjusting characteristics of publicly traded REIT portfolio to match as closely as possible composition of the private Market to make them comparable
The unconditional Approach
• Management fees
• Representative portfolios:
- Property types ="Core" property (Same property in each index)
- Weight: Same weight of core property in public/Private
Final Core properties TBI index
Smoothing & Stale Appraisal
CRSP Ziman Database
Data from the quarterly CRSP
Computstat data base (Levered)
CRSP Ziman with quarterly returns
Initial Sample of publicly trades US equity REIT
Deleveraging Computstat data base
Deleveraging Computstat data base
Levered Vs. Unlevered
2.Private benchmark creation and performance
3.Public benchmark creation and performance
4.VAR model and dynamics of both markets
However: Do those result really reflect reality? Omitted factors?
Other private benchmark example:
Time series of cumulative returns
is a vector of return (here REIT and TBI)
is parameter with modulus less than 1.
REIT Doesn't explain TBI anymore, but neither does most of the other factor.
Apartments have short-term contract (1Y)
React quicker and less than the others (Max 25Y)
some asset pricing model omitted.
Shock in REIT impact TBI until t4.
With asset pricing factor, it cannot be distinguished from 0 anymore.
Unlevered core REITs
the private market
• By 49 bps for average returns
• With lower volatility ( 138 Bps)
... annually from 1994 to 2012
- US office & retail REITs
Their private Market benchmarks
- US multifamily REITs
Apartment Private market
- US Industrial REITs
Industrial Private Market
- Academically interesting.
- REIT is a better measure as it includes information quicker.
- TBI is simply a smoothed Index.
- It need to choose better parameter
> unemployment rate for apartments ?
> too much parameter ?
Same property type weights than Core properties TBI Return Index
Establish the relationship between the public and private real estate market