| This thesis is an empirical investigation of the systematic risk and return characteristics of income producing real estate. Real estate, while an important asset in the market portfolio, is a relatively unexplored area, as property usually trades infrequently at undisclosed prices. This thesis develops and utilizes a proprietary database of equity return and accounting information for 65 publicly traded REITs (real estate investment trusts) over the period January, 1971 to January, 1981 to produce historical risk and return estimates of real estate assets that have been securitized. No analysis of development projects is attempted.The interpretation of these empirical results produces the following general conclusions. First, while real estate systematic risk exceeds the risk of lower quality corporate bonds, the risk is less than that of unlevered corporate equity issues. In addition, historic risk and return are found to differ considerably between classes of real property. Finally, increased financial leverage has a direct, positive effect on systematic risk, with short term debt having a greater unit effect on systematic risk than long-term debt.Two alternative empirical methodologies, with model specifications strongly supported by financial theory, are employed to integrate the economic balance sheet structures with equity return information for the individual REITs. In the first empirical section, a security Beta model specification is able to estimate the unlevered systematic risk of two real estate loan and six real estate equity classes from a sample of multi-divisional and pure-play firms. The replacement of book value liability information with market determined debt and equity ratios greatly improves the significance of the estimates. In the second empirical section, REITs are placed in portfolios, according to their property class holdings. Excess return regressions of these portfolio returns produce levered Alpha and Beta estimates by property class. After calculating what individual REIT equity returns would have been in the absence of leverage, the portfolio approach is used to produce unlevered risk and return estimates for each property class. |
