What Does the Stock Market Tell Us About Real Estate Returns?

This paper analyzes the risks and returns of different types of real estate‐related firms traded on the New York and American stock exchanges (NYSE and AMEX). We examine the relation between real estate stock portfolio returns and returns on a standard appraisal‐based index, and find that lagged values of traded real estate portfolio returns can predict returns on the appraisal‐based index after controlling for persistence in the appraisal series. The stock market reflects information about real estate markets that is later imbedded in infrequent property appraisals. Additional analysis suggests that the differences in the return and risk characteristics across different types of traded real estate firms can be explained in part by appealing to real estate market fundamentals relating to the degree of dependence of the real estate firm upon rental cash flows from existing buildings. These findings highlight the heterogeneity of securitized real estate‐related firms.