Private and Public Real Estate - What is the Link?
Jun 16, 2010
In this paper, we study the relationship between private and public real estate in the US and UK markets and demonstrate a strong link between returns in each of these markets. To uncover these relationships, we correct for appraisal smoothing and properly account for the lead-lag relationship between public and private returns. We find that public returns lead private returns, even after removing appraisal smoothing in private returns. We also discuss how real estate risk changes over longer horizons. In particular, our results suggest that private and public returns become more correlated at longer investment horizons. This carries important implications for risk management and strategic asset allocation.