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Yale International Center for Finance

Working Paper No. 99-03

Yale School of Management
Working Paper No. Forthcoming

March 7, 1999

Global Real Estate Markets: Cycles And Fundamentals
Bradford Case Yale University William Goetzmann Yale School of Management K. Geert Rouwenhorst Yale School of Management

This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection at: http://papers.ssrn.com/paper.taf?abstract_id=157019

Global Real Estate Markets -- Cycles and Fundamentals
Bradford Case, Yale University William Goetzmann, Yale School of Management K. Geert Rouwenhorst, Yale School of Management Very Preliminary! Comments Welcome March 7, 1999 Abstract The correlations among international real estate markets are surprisingly high, given the degree to which they are segmented. While industrial, office and retail properties exist all around the world, they are not economic substitutes because of locational specificity. In addition, the broad securitization of real estate property companies has, until recently, lagged that of other types of companies. Never-the-less, international property returns move together in dramatic fashion. In this paper, we use eleven years of global property returns to explore the factors influencing this comovement. We attribute a substantial amount of the correlation across world property markets to the effects of changes in GNP, suggesting that real estate is a bet on fundamental economic variables which are correlated across countries. A decomposition shows that a local production factor is more important in some countries than in others.

Please address comments to: William N. Goetzmann Yale School of Management Box 208200 New Haven, CT. 06520-8200 william.goetzmann@yale.edu Acknowlegements: We thank Ibbotson Associates and members of the International Commercial Property Associates consortium for use of their data. We thank the International Center for Finance at the Yale School of Management for research support.

1997). 2 . the reality is that there were no safe havens for property investors in the years 1991 and 1992. The conjecture in GW was that this slump was due to exposures to global GDP.buildings from one market cannot be moved to the other. one might also expect international property markets to exhibit low correlations due to the difficulties of re-locating businesses across national boundaries.I. the world’s office markets plunged into a slump together. Eicholtz et. Liu and Mei. While economists looked for local reasons for local decreases in property values. one would expect the correlation of changes in property values across markets to diminish with the distance between them. This logic makes the evidence about co-movement in international property returns all the more striking. Studies measuring the diversification benefits of real estate and other asset classes suggest real estate compares favorably in this dimension (e. There are no short-term arbitrage forces preventing prices in one local market from suddenly getting hot while prices in another local market are dropping -. Unfortunately. For the most part. Thus. Eicholtz and Hartzell. Despite their separation by political boundaries and great distances. Liu. Al. After looking at recent published empirical evidence. property owners compete locally for business. While inter-urban competition for industrial. customer choice depends upon a number of economic factors beyond the price and quality of the space. Hartzell and Hoeseli. 1998. Introduction The real estate business is distinguished from almost all others by the fact that its “product” is not portable. Eicholtz. 1996. 1998. it is clear that international real estate investment is useful for portfolio diversification. Goetzmann and Wachter (1996) [GW] document that the real estate crash in the early 1990's was felt by nearly every country in the world. office or retail space exists.g. 1996. Diversification did not help. For the same reasons.

insufficient time-series data prevented any formal test of the conjecture. Together. we show that an investment in a global real estate portfolio is essentially a bet on broad trends in global production. global GDP has the greatest effect. In addition. He also discusses the co-cyclycality of global economies and real estate. We find strong evidence to show that removing the effects of both country-specific GDP and global GDP from returns significantly decreases global real estate market correlations. Our goal is to separate global from local economic effects on the covariance of real estate returns. we estimate the incremental value of local economic fluctuations in explaining real estate performance. we find that even markets that are segmented by definition can exhibit significant correlations if they are exposed to a common source of risk. Renaud (1997) considers the degree to which unique events in the late 1980’s may have led to the correlated change in real estate prices and the global economy. We explore the relationship in considerably more depth than GW and take a different approach to GDP effects than Quan and Titman. using the same data sources as GW and longer time series document that real estate is significantly correlated to stock returns and to changes in GDP. we use 11 years of commercial property data to examine the relationship between GNP changes property returns. 3 . Work by Quan and Titman (1998). In his in-depth analysis of the international real estate slump of the 1990’s. The implications of our results are twofold. Second. these recent studies suggest that a mix of global and local economic factors influence the world’s real estate markets. Thus. Of the two. we test to see whether the correlations across global real estate markets are due to common exposures to changes in world GDP. First. In particular. In this paper. world real estate markets are largely correlated through common GDP effects.

Since we do not have income and capital appreciation returns reported as such in the 4 . but London-based Hillier Parker has continued to organize European firms to share data for European markets. Thus. Over the past decade.particularly emerging markets in Asia. This is useful but not always representative of the markets in all countries. particularly the lack of industrial and retail information about Japan. some of the markets included in our database may have been “backfilled” and the paucity of data about other markets. the data for Asian real estate markets is also collected by several affiliates of Hillier Parker and published by its Hong Kong affiliate. These estimates were published as ICPA’s "International Property Bulletin" and ONCOR’s "World Real Estate Review. for example. may result from recent lack of interest in international investing there.II. Some authors have collected returns from publically traded property companies in a number of countries for successful analysis." Both ICPA and ONCOR have ceased publishing these data. their estimates of yields and effective rents were formed by firms operating in each market according to commonly agreed upon standards. and thus potentially biased by positive performance. new markets entered -. in "Asian Property Market Survey. and depends upon the existence of public markets in property companies." and "European Property Bulletin. Brooke Hillier Parker. Our data source is a recently dissolved global consortium of real estate firms that collectively shared yield and effective rent data sampled and assembled on an annual basis. In addition. these firms were affiliated through International Commercial Property Associates (ICPA). with a successor agreement with ONCOR International." Throughout the time ICPA existed. Data International property return data is difficult to obtain. Until recently. The existence of these markets in the database is undoubtably conditioned upon investor interest.

S. because the required data were available for both cities.S.S. the analysis must be restricted to those markets for which estimated rents and yields are available for every year during the period 1987-1997.S. Rents and yields were estimated for consistently-defined standard properties in the prime commercial districts of each city by commercial real estate firms in each country. Therefore the nominal foreign-currency returns were converted to real U. Specifically. Table 1 shows the 22 markets from 21 countries included in the analysis under this criterion. we estimate them using yields and cap-rates.t ' Yi. and Ri. are included.t 1 % & 1 where Ti. dollars. dollar terms by using the exchange rate in effect at the end of each year and then deflating by the U. Yi. and standard deviations of the total 5 . While the effective rent data are given in nominal terms and generally denominated in local currency. This implicitly assumes that the perpetuity formula is a reasonable approximation to value.t equals the estimated yields (going-in cap rates).database. inflation rate. and retail real estate in 22 cities around the world is the sum of the estimated yield and the change in capitalized estimated effective rents: [Rt/Yt] [Rt 1/Yt 1] Ti. office.t equals estimated total return for city i at time t. investor it is more relevant to consider returns expressed in U. While these sources present data for a large number of cities. Two German markets. Dusseldorf and Frankfurt.t equals estimated effective rents. arithmetic means. from the perspective of a U. total returns (income and appreciation) for prime industrial. Table 1 shows the geometric means.

is only slightly higher than obtained from other appraisal-based indices.S. Only Hong Kong. The average total returns are in some cases spectacularly high: for example. the geometric means for the 11-year period exceed 20 percent for industrial space and office space in Hong Kong. Figure 1 shows the trend in real estate returns over the period 1987 through 1997 for each country and property type. we measured the correlation to the NCREIF index . The volatility for the U.S. and Thailand and for retail space in Portugal and Thailand. on average.56. The year 1997 closely resembles the early 90's. correspond to appraisalbased returns in the U. Figure 2 shows the dollar-denominated changes in GDP for each country. we are using series’ that more closely resemble and indeed track the appraisal-based indices commonly used in the U. CPI over the same time period. The eleven-year period contains two booms and two busts in 6 .S. with standard deviations exceeding 40 percent in several cases. however. when most real returns were negative. At the same time. Malaysia and Portugal had strong positive returns in the three-year slump. The comovement between markets also shows up in the correlations.S. Portugal. Office property index had a correlation of .S. Singapore. There were almost no safe havens during this period. The crash of the early 1991 through 1993 shows up clearly as a majority of markets and property types experiences negative real returns during the period. the correlations within property types across countries ranged between 0.S.44.S.return series computed for each type of real estate. to measure commercial real estate performance. As a check on whether the yield-based return series’ for the U. these investments were extremely volatile. The U. Singapore. Neither had a significant correlation to the NAREIT index of equity real estate investment trusts.33 and 0.84 to the NCREIF index and the U. We do not report the entire 60 by 60 correlation matrix. Industrial property index had a correlation of . Thus. and for the stock market total return series. deflated by the U.

This second test allows us to examine whether exposure the global economy explains correlations. The relationship to the real estate cycles is unmistakable -. Finally. we first remove the effects of a country’s own GDP on its property return series through univariate linear regression of the return series on contemporaneous GDP changes. III.the global economy. To do this. We then perform the same test after removing the effects of an equal-weighted index of GDP changes. we expect the average correlation to decrease. we compare the correlation matrices of the raw returns and of the regression residuals. If local GDP effects are important and uncorrelated across countries. In the next section we more formally test the effects of GDP on real estate market trends and correlations. If the local the GDP factor reflected both important local economic effects and global economic effects. In the second test. Rejecting the null hypothesis of equality of returns and residual correlations would provide strong support for the hypothesis that the co-movement of global real estate markets is driven by common exposure to factors affecting production. This is not necessarily the true when we extract each country’s own GDP effect. Then for each property type. we perform a paired t-test of the off-diagonal elements in the return and residual correlation matrixes to determine whether the difference in the means is significant. then removing them could increase correlations of the residuals.property returns clearly fluctuate with GDP changes. Methodology In this section we test the hypothesis that international real estate markets are correlated through GDP. 7 . however. since we are simply extracting a common factor. then correlations could either increase or decrease.

local GDP effect. the average correlation in the Industrial property sector drops to 0. Another way to evaluate the effects of removing local GDP and global GDP is to examine the change in summed variance. III. although highest for office properties. Removing the global factor decreases variance by 58 to 72 percent.the sector most closely tied with production -. In order to compare the relative effects of global vs. important. we use econometric methods to separate the two. The largest proportional drop was in the Industrial property sector -. Removing only the local factor results in 20 to 30 percent variance reduction.1 T-test results Table II reports the results of the paired t-test for each property-type in the sample.2 Global vs. Notice that purging the returns of the equal-weighted GDP factor results in an even larger and strongly significant decrease in average correlation across countries. The correlation of dollar-denominated returns is relatively high for each property-type. In fact. For example. The table shows that purging the returns of the effects of own-country GDP changes results in a significant drop in average correlation across country. however we no empirical evidence to support this conjecture.III.which dropped to a third of it value. the recent performance of Asian real estate markets suggests that local GDP factors may overwhelm global trends. on average. Cross-sectional differences may be relevant. In Table III we report the R2 from 8 . however. It is tempting to attribute this high correlation to the fact that customers for class A office space in major countries around the world have increasingly become the same 100 multi-national firms.087. Local Effects The analysis thus far shows that the effect on covariance of removing an equal-weighted global GDP factor is.

together with the equal-weighted global GDP factor as variables to explain each real estate market. 9 . I. we use the ratio only for the purposes of indicating the tendency in each market for the local factor to predominate over the global factor. we take the difference in R2 and divide by the R2 from the regression on the global factor alone. although this would be appropriate if we were explicitly testing an hypothesis with this ratio. we use it and Gwt as regressors to explain the total return series for a real estate market: Tit = ! + "1Gwt + "2 #it + $it and save the R2 from this regression as RA2. In stage 2. To do this. Thus. We have not used adjusted-R2. That is: (RA2 -RB2)/RB2. we use these residuals in a regression. In order to determine the importance of the local GDP component to the global GDP component.the incremental variance explained by the local residual variable is less that the amount of variance explained by the global factor. Thailand. the global factor is most important -. Finally. It is important to note that the number of time-series observations in each regression is only eleven. where Git is the change in GDP for country i at time t and Gwt is the equal-weighted global GDP factor realization at time t. We might expect this for the U. and to some extent. In fact for most markets. in stage 1. Malaysia and Spain are countries where local GDP effects dominate global influences.K. we would expect relatively high R2 from a regression with two explanatory variables. and the U.regressions in which we separate the GDP factor into local and common components. the U. we first regress each GDP series on the equal-weighted global GDP factor and save the residuals. we use only Gwt as an explanatory variable: Tit = ! + "Gwt + $it and save the R2 from this regression as RB2. With these caveats in mind.e. Hong Kong. Canada. We find that Australia. we estimate the local GDP factor it with the regression: Git = ! + "Gwt + #it . Next.S. U..S.K. however. There are a few markets that differ from this norm.

This is not true for some of the other countries. while fundamental economic factors explain much of the performance of local real estate markets. The table suggests that. indicating strong persistence. office and retail. or market capitalization weights.3 Time-series regressions Although we have only eleven years of data. the contemporaneous GDP change is significantly related to returns. This is potentially important. however. it is useful to further consider how the global GDP factor is related to the fluctuations of property returns.S. In two of the three regressions.since the GDP factor is equal-weighted and these two countries’ GDP’s would obviously have a larger than equal weight were we using gross GDP weights. included. the lagged value of the return series is also significant. and include the one-year lagged values of GDP changes and the lagged property-type return itself. This does not mean our return series’ are unpredictable random walks. and the lagged value is not. our time-series results are broadly consistent with Quan and Titman (1998). the effects of local economic deviations from global trends are more important for some countries. III. In Table III we regress equal-weighted portfolios of property-types on the equal-weighted GDP factor. the U. in order to control for autocorrelation in the regression error. because one criticism of all appraisal-related real estate data is that it captures “asking rents” not “effective rents. The lack of a lagged relationship between GDP and real estate returns suggests that contemporaneous economic conditions are reflected in our data.” Asking rents are typically sticky and thus are a stale measure of real estate markets. Note that in each case. 10 . In this regard.

This regression indicates that in at least one market where we do have long-term data. Time-Series Regression Although long-term international data is unavailable. by property type. Contemporaneous GDP growth has a coefficient of .S. IV. we have time-series data for the U. The inclusion of four lags for each series appears to eliminate the autocorrelation of the errors in the regression -.the Durbin-Watson statistic is 2. One way to explore these limits is to consider how the volatility of a real estate portfolio decreases as more markets are added to the portfolio. the relation between GDP growth and real estate returns is a strong one. Figure 3 shows the average percentage reduction in volatility achieved by adding additional countries in sequence. and the NCREIF index for years 1995 through 1997. Country stock markets are provided for a comparison. Diversification The co-movement of real estate markets through exposure to global GDP changes is potentially meaningful to investors because it suggests that despite the obvious importance of local economic conditions to the determinants of property values. The greatest percentage reduction in risk through international diversification is achieved by the industrial property type and the least percentage of reduction in risk through international diversification is achieved by office markets. We use Ibbotson Associates Business Real Estate total annual return series from 1960 through 1994.III.S.4 U. The results of this regression are reported in Table 4.S. Both office markets and retail 11 . This is the dependent variable in a regression that includes four years of lagged values and contemporaneous and four lagged values of U. GDP growth. commercial property market that extends from 1960. diversification has its limits.65 and is strongly significant.

In effect. in some countries local factors explain considerably more. than do global factors.markets appear to offer slightly lower relative benefits to international diversification than do equity markets. Figure 4 shows the result of removing the global GDP factor from each series. Notice that the risk of the industrial portfolio drops considerably.7 % of the variance of a portfolio with a single country industrial real estate portfolio investment. 12 . the figure shows the results of a portfolio continuously hedged against GDP risk. In general. demand for space apparently responds to contemporaneous changes in the global economy. Conclusions Our analysis of the relationship between changes in GDP and international property returns suggests that the cross-border correlations of real estate are due in part to common exposure to fluctuations in the global economy. Our analysis of international diversification suggests that portfolio volatility is reduced by cross-border property investment. This is somewhat surprising in light of the fundamentally location-specific nature of real estate as an investment. actually yields greater diversification benefits than international equity market diversification. Country-specific GDP changes help explain more of the variation in real estate returns. The lower bound is at 13. Indeed. in percentage terms. but that only one asset class. Industrial properties. however the figure suggests that the international diversification benefits to real estate are similar in magnitude to those of the equity markets. and is well below the equity portfolio limit. as measured by an equal-weighted index of international GDP changes. Our study suggests that. while real estate is fundamentally local. V.

Crocker.3-39. 1998. 1998. Liu . Crocker and Jian-Ping Mei. Piet. pages 13-44. Echange Rate Risks and Diversification Consequences. 57-62. David J. pages 107-18. “The Global Real Estate Crash: Evidence From An International Database. Daniel C and Sheridan Titman. “Continental Factors in International Real Estate Returns” Real Estate Economics 26:3 493-509. Goetzmann. Piet.. 1996. Hartzell. Renaud. Piet. 1994. 1996. January 1997. “Does International Diversification Work Better for Real Estate than for Stocks and Bonds?” Financial Analysts Journal. “The Predictability of International Real Estate Markets.Lipscomb . Ronald Huisman. pages 193-221. Eicholtz. "The 1985-1994 Global Real Estate Cycle: Are There Lasting Behavioral and Regulatory Lessons?" Journal of Real Estate Literature 5(1). 1997. Hoesli. 1996. Appraisals and the Stock Market: An International Perspective. 1996"Property Shares. pp. “The Stability of the Covariances of International Property Share Returns” Journal of Real Estate Research. Real Estate Economics. Martin E. Summer 1997. Eichholtz. Hartzell.. Bertrand.” forthcoming. David J.25(2). Mauricio Roderiguez and Joseph B. 13 .11(2). March 1996.References Barry. Quan. 1996. January-February. Liu. pages 149-58. Lisa Sehuin. Christopher-B. Eicholtz.” Journal of Real Estate Finance and Economics. 1996.. 1998.. pages 163-78. Piet.” Yale School of Management Working Paper. William and Susan Wachter. 1996. Eicholtz. Kees Koeddijk.” Real Estate Economics 26:1. “International Evidence on Real Estate Securities as an Inflation Hedge” Real-Estate-Economics. “Diversification Potential from Real Estate Companies in Emerging Capital Markets” Journal of Real Estate Portfolio Management 2(2). “Do Real Estate Prices and Stock Prices Move together? An International Analysis.12(2).

31 7.18 14.73 23.57 NA NA 7.20 4.73 3.54 NA NA -0.71 -10.20 NA -0.60 30.07 31.05 9. Dollar-Denominated Returns Summary statistics for the ICPA data by country and property type over the period 1987 through 1997.54 3.33 0.28 8.09 18.78 33.35 4.25 5.29 -0.76 0.04 0.85 47.30 7.72 40.12 36.57 8.80 15.29 41. inflation rate.22 12.51 12.32 0.76 0.96 4.86 18.27 15.54 27.13 NA 4.63 17.94 19.94 4.88 31.17 0.01 11.52 -0.14 21.25 16.70 23.73 13.75 11.66 0.13 0.32 5.39 0.88 -5.82 NA 20.26 20.68 7.51 NA 5. dollars and deflated by the U.S.47 7.12 4.25 -0.25 0.90 14. Returns are estimated fromyields and effective rents as discussed in the text.S.13 23.46 0.07 -0.33 34.48 14.30 -0.51 0.39 0.66 10.47 5.57 -0.55 -0.07 32.56 1.14 20.95 11.10 7.26 0.47 0.18 9.28 0.03 8.25 18.46 9.14 7.65 11.18 30.18 0.61 16.75 13.05 0.60 27.31 -8.96 20.50 NA 0.16 NA 5.01 11.76 14.23 35.61 4.97 0.54 15.88 9.79 13.55 NA 3.20 12.46 5.26 24.24 8.25 7.20 NA NA 17.19 10.04 0. Industrial Properties Country or city Geometric Return Arithmetic Return Standard Deviation Serial Geometric Correlation Return Office Properties Arithmetic Return Standard Deviation Serial Geometric Correlation Return Retail Properties Arithmetic Return Standard Deviation Serial Correlation Australia Belgium Canada Denmark Finland France G-Dusseldorf G-Frankfurt HongKong Ireland Italy Japan Malaysia Netherlands Portugal Singapore Spain Sweden Switzerland Thailand UK USA 12.61 4.08 5.50 9.05 0.99 NA 0.16 -0.42 0.76 21.80 15.05 NA 16.33 10.53 20.26 0.21 9.69 10.43 22.33 15.08 17.53 12.40 25.34 19.16 -12.00 46.42 5.52 33.62 44.18 NA -0.18 NA 14 .43 45.95 28.67 0.19 17.18 9.49 4.19 45.14 9.43 0.54 0.16 1. and converted to U.20 0.40 0.00 -17.68 7.77 14.24 -0.56 7.07 -0.05 0.06 21.07 -0.77 27.29 4.34 2.29 32.06 NA NA 9.24 NA -0.06 21.37 12.85 NA 39.19 22.45 11.50 4.94 29.29 6.68 24.36 0.20 0.18 25.81 -2.41 11.25 28.10 27.09 0.S.Table I: Summary Statistics of Real U.39 8.11 9.67 11.35 35.50 26.98 22.61 34.05 0.68 40.25 0.13 0.56 9.70 -0.81 2.35 0.11 16.42 10.16 0.99 26.27 22.93 NA 6.04 27.89 15.39 13.61 34.41 0.59 0.20 13.46 5.53 11.53 31.46 0.92 18.24 NA 5.46 21.43 -0.88 8.71 -3.84 51.78 1.51 0.82 8.22 0.75 30.70 24.58 2.56 7.48 42.10 -7.17 NA 31.

dollar denominated.199 0.121 15.452 0.616 0. t-statistics have not been corrected for doubled off-diagonal values in the correlation matrices.309 0.363 0.719 Office 0. Industrial Average Correlation of Returns Average Correlation of Own GDP Residuals t-stat of Paired t-test of difference Average Correlation of World GDP Residuals t-stat of Paired t-test of difference Variance Reduction: Own GDP Variance Reduction: EW GDP Factor 0.335 0.162 10.087 13.602 Retail 0.787 0.334 0.Table II: Test of the Equality of Means This table reports the results of testing the hypothesis that the average off-diagonal element in the correlation matrix of property-type returns across countries in the sample is equal to the average off-diagonal element in the correlation matrix of residuals that result from the return series being regressed on its own change in GDP.157 0.129 11.439 0.284 0.584 15 .S.265 11.807 0. All returns and residuals and GDP changes are real U. Please note.270 10.

003 0.799 0.390 0.397 0.123 0.357 0.440 0.111 0. R2 are unadjusted.009 0.285 NA 0.318 0.451 0.255 NA 0.619 0.059 0.016 0.541 0. The ratio is the difference in R2 between the two regressions.217 0.689 0.051 0.014 158.102 2.013 2.218 NA 2.169 34.059 0.096 0.136 6.462 0.238 1.673 0.572 0. Local GDP Effects R2 from (1) regressions of returns on the equal-weighted global GDP factor and the orthogonal local GDP factor for each market and (2) regressions of returns on the equal-weighted global GDP factor alone.314 0. Ratios for countries where the incremental R2 due to local GDP changes exceeds R2 due to the global GDP factor are in bold.387 0.830 0.557 0.170 0.300 0. Industrial Properties Country or city R2 local + global R2 global Office Properties R2 global Retail Properties R2 global Ratio R2/global R2 Ratio R2 R2/global R2 local + global Ratio R2 R2/global R2 local + global Australia Belgium Canada Denmark Finland France G-Dusseldorf G-Frankfurt Hong Kong Ireland Italy Japan Malaysia Netherlands Portugal Singapore Spain Sweden Switzerland Thailand UK USA 0.263 0.516 0.009 0.543 0.450 0.108 0.067 52.001 0.032 1.776 0.588 NA 0.251 0.050 0.072 0.628 0.451 0.354 0.114 NA NA 0.134 0.308 0.604 0.584 0.167 0.258 NA NA 0.464 0.030 0.310 0.700 0.443 0.082 0.787 NA 0.Table III: Global vs.287 NA NA 0.102 0.424 0.484 0.691 0.769 0.444 0.009 7.516 0.170 0.759 0.125 0.482 0. scaled by the R2 of the regression on the global GDP factor alone.735 0. which is constructed as an equal-weighted portfolio of each country’s change in GDP.004 0.069 0.847 0.446 0.409 0.249 0.437 0.267 1.425 0.358 0.380 NA 16 .514 0.478 0.389 0.324 0.517 0.447 0.987 2.051 1.238 0.308 0.031 24.449 0.086 1.181 0.065 0.169 0.445 0.833 0.170 0.147 1.397 0.386 0.359 0.464 0.275 0.507 0.005 0.499 0.841 0.425 0.000 0.512 0.081 0.012 0.326 0.302 0.326 0.053 NA 0.611 NA 0.023 0.501 0.735 0.545 0.038 NA 0.168 0.962 0.003 244.533 0.678 0.334 0.482 0.328 0.523 0.873 0.040 0.057 0.254 0.446 0.169 0.684 0.719 0.310 0.166 0.748 NA 0.196 0.289 0.859 0.589 0.167 0.003 0.737 0.352 0. The orthogonal local GDP factor is constructed by regressing each country’s change in GDP on the equal-weighted global GDP factor.619 0.216 0.005 0.106 0.580 0.188 0.331 0.789 NA 0.438 0.855 0.374 0.395 0.457 NA 0.169 0.

224 -0.587 1.325 coef -0.808 -.480 1.78 .588 0.86 0. Industrial coef Intercept Equal-Weighted GDP Equal-Weighted GD[-1] Property Portfolio [-1] Durbin-Watson R-Square 0.321 -0.350 coef 0.876 -1.344 2.647 2.861 0.709 1.Table IV: Time-Series Regression of Property-Type Portfolios on A GDP Factor Results from regressions of equal-weighted property-type portfolios on an equal-weighted GDP factor over the period 1987 through 1997.560 -0.227 3.48 .76 t-stat 0.754 Office t-stat 0.160 -0.013 1.307 17 .329 3.778 Retail t-stat -0.343 0.010 1.369 0.005 0.123 1.

161 18 .224 2.Table V: U.716 0.331 -0.068 -0.742 -0.533 -0. Period: 1960 .483 1.S.S.178 -1.217 0.1997 Intercept GNP GNP t-1 GNP t-2 GNP t-3 GNP t-4 Business Real Estate t-1 Business Real Estate t-2 Business Real Estate t-3 Business Real Estate t-4 Durbin-Watson R-squared Coefficient -0.044 0. For 1995 through 1997.450 2.S. Business Real Estate is taken from Ibbotson Associates EnCorr database and measures the total return to a portfolio of commercial real estate over the period 1960 through 1994.691 1.164 -1.350 5.779 -0.785 T-Statistic -1.436 2. the NCREIF total return index is used.399 0. Business Real Estate total Return and Changes in U.407 1.03 0. GDP U.208 -2.

00 0.Return Values 1.1997 19 .62 Dec 1987 Australia I Ireland I Switzerland I Finland O Malaysia O UnKingdom O G-Frankfurt R Sweden R Dec 1988 Belgium I Italy I Thailand I France O Netherlands O USA O HongKong R Switzerland R Dec 1989 Dec 1990 Denmark I Malaysia I UnKingdom I G-Dusseldorf O Portugal O Australia R Ireland R Thailand R Dec 1991 Finland I Netherlands I USA I G-Frankfurt O Singapore O Belgium R Italy R UnKingdom R Dec 1992 Time France I Portugal I Australia O HongKong O Spain O Denmark R Netherlands R Dec 1993 G-Dusseldorf I Singapore I Belgium O Ireland O Sweden O Finland R Portugal R Dec 1994 Dec 1995 Dec 1996 HongKong I Sweden I Denmark O Japan O Thailand O G-Dusseldorf R Spain R Dec 1997 G-Frankfurt I Spain I Canada O Italy O Switzerland O France R Singapore R Figure 1: Annual Returns For all Markets and Property Types: 1987 .40 0.80 0.20 1.40 1.20 -0.60 0.00 -0.20 0.48 1.40 -0.

12 0.20 -0.08 0.12 -0.Return Values 0.16 0.34 0.20 0.08 -0.24 0.28 -0. .04 -0.36 Dec 1987 Australia G Italy G Thailand G Dec 1988 Belgium G Japan G UnKingdom G Dec 1989 Canada G Malaysia G USA G Dec 1990 Dec 1991 Denmark G Netherlands G Dec 1992 Time Finland G Portugal G Dec 1993 France G Singapore G Dec 1994 Germany G Spain G Dec 1995 HongKong G Sweden G Dec 1996 Ireland G Switzerland G Dec 1997 20 CPI.28 0.00 -0.1997 Figure 2: Dollar-Denominated changes in GDP deflated by the U.32 -0.16 -0.24 -0. 1987 .S.04 0.

Benefits of Global Diversification in Real Estate by Property-Type 100 80 Industrial Office Retail Stock Markets 60 40 10 21 20 Figure 3 .

Benefits of GDP-Hedged Global Diversification in Real Estate by Property-Type 100 80 Industrial Office Retail Stocks 60 20 40 10 20 Figure 4 22 .