Real estate stocks lead direct market by six months

Real estate stocks generally lead moves in the underlying direct property market by an average of six months, according to the latest research published by the European Public Real Estate Association (EPRA) in association with US investment firm Cohen & Steers.

'The Cohen & Steers study not only provides evidence that listed property markets lead direct property markets, but also adds to a mounting body of research that supports the idea that real estate stocks behave like real estate, not general equities, though with better transparency and more liquidity,' noted Fraser Hughes, EPRA research director.

The study also found that listed markets experience higher peaks and lower troughs than direct markets. Cohen & Steers speculates that this stems from the fact that the returns of the listed property series incorporate leverage, while the direct property series does not, even though direct investors also use leverage.

The study suggests that while real estate stocks demonstrate higher levels of risk compared with direct real estate, it is likely that the real risk in the underlying physical market is strongly understated due to the influence of appraisal ‘smoothing.’ For example, the measure of risk (standard deviation) of the direct market in the US is only slightly higher than for government bonds; and for the UK and Australian direct markets, it is lower than sovereign debt.

Scott Crowe, global portfolio manager at Cohen & Steers and co-author of the study, concluded: 'We believe that understanding the relationship between the two markets (listed and direct) has useful implications for investors. By using listed property returns as a leading indicator of direct real estate performance, investors can meaningfully improve their asset allocation decisions.'

The report is available to Epra members on www.epra.com.