Indirect Real Estate Investments and their Links with Properties, Common Stocks and the Macroeconomy Alexander Schätz European Real Estate Society Conference 2010 in Milano, June 23-26, 2010

Seite 2 Approach 1.Conventional Approach  US Model:NAREIT Equity REIT Index, NCREIF Property Index, S&P 500  UK Model: FTSE 350 Real Estate Index, IPD, FTSE Real Estate Investments and the Macroeconomy  Direct Real Estate Investments  Indirect Real Estate Investments 3.Macroeconomic Approach  3 Assets (Direct RE Investment, General Stocks, Indirect RE Investments)  GDP  CPI  Short-Term Interest Rates  Long-Term Interest Rates / Mortgage Rates

Seite 3 Sample Selection and Structural Breaks Results for the US and UK Markets Approach ConventionalMacroeconomic 3 AssetsCPI, GDP CPI, GDP, Long- Term Rates (10y) CPI, GDP, Short- Term Rates (3m) Q – Q Instable Dubious signs Q – Q Instable Dubious signs Q – Q Stable Q – Q Stable

Seite 4 Conventional Approach VECM (β – vectors) and Variance Decomposition Sample: Q – Q % % Time

Seite 5 Real Estate and the Macroeconomy VECM (β – vectors) Sample: Q – Q Indirect Investment Direct Investment

Seite 6 Macroeconomic Approach VECM (β – vectors) Sample: Q – Q Macroeconomic Approach including Short-Term Interest Rates 2

Seite 7 Macroeconomic Approach Variance-Decomposition United States United Kingdom % % Time

Seite 8 Empirical Results: VECM (β – vectors) Sample: Q – Q Macroeconomic Approach including Long-Term Interest Rates

Seite 9 Empirical Results: VECM (β – vectors) United States United Kingdom % Time

Seite 10 Summary 1.The conventional approach indicates a stronger impact of direct real estate in the long run. 2.Direct and indirect real estate investments are driven by exactly the same macroeconomic factors. 3.The macroeconomic approach indicates a stronger impact of direct real estate in the long run.

Seite 11 Thank you for your attention!

Seite 12

Seite Literature: “Features of Real Estate Assets“ Author (Year)MethodFindings Ling and Naranjo (1999) Real Estate Economics Multifactor Asset Pricing Model (MAP) Exchange-traded real estate and equity markets are integrated Degree of integration increased during the 1990s Glascock et al. (2000) Journal of Real Estate Finance and Economics CointegrationREITs are rather comparable with stocks than bonds Bond et al. (2003) Real Estate Economics CAPM Substantial variation in mean returns and standard deviations across the examined countries Hamelink and Hoesli (2004) Real Estate Economics Cross-sectional regressions Dominant role of country factors Relevance of size factors and value/growth factors Westerheide (2006) ZEW Working Paper Engle Granger Test, ECM, Johansen Procedure In the long run: Real estate equities reflect the direct real estate; (weak) hedge against inflation Morawski et al. (2008) Financial Markets and Portfolio Management Johansen Procedure In the short run: Real estate equities follow the general stock market In the long run: Real estate equities reflect the direct real estate

Seite 14 Author (Year)MethodFindings Liu et al. (1997) Real Estate Economics According to Fama, Schwert (1977) as well as Geske, Roll (1983) Real estate do not represent a better hedge against inflation compared to common stocks Liang and McIntosh (1998) Journal of Real Estate Portfolio Management Regressions and Rolling Correlations Positive linkage between employment growth of metropolitan areas and their property markets Quan and Titman (1999) Real Estate Economics Regressions significant relation between real estate prices and stock prices inflation-hedging characteristics in the long run Sing (2004) Journal of Property Research Multifactor Asset Pricing Models (MAP) Macroeconomic risk factors are priced different in securitized and direct real estate markets Hoesli et al. (2008) Journal of Real Estate Finance and Economics Vector error correction approach positive linkage between commercial real estate and anticipated inflation Negative linkage due to inflation shocks 3. Literature: “Real Estate and Macroeconomics“

Seite Methodology: Cointegration and VECM Cointegration Tests 1. Trace-Test H 0 : There are at most r positive eigenvalues H 1 : There are more than r positive eigenvalues p λ Trace = - T ∑ ln(1-λ i ) r+1 2. Maximum Eigenvalue H 0 : There are exactly r positive eigenvalues H 1 : There are exactly r+1 positive eigenvalues λ max = - T ln(1 -λ r+1 ) Vector Error Correction Model (VECM) ∆Y (n x 1) vector of the first differences of stochastic variables ГiГi (n x n) matrices representing the short-term dynamics ß (n x r) matrix representing the r cointegrating vectors α (n x r) matrix containing the loading parameter μ (n x 1) vector of constants εtεt error term