Essays in Real Estate Finance

The first essay examines the relationship between publicly and privately traded commercial real estate and macroeconomic risk. To represent publicly traded real estate, I use exchange listed US Real Estate Investment Trusts (REITs), and to proxy for direct and privately traded real estate, I use a transaction based index (TBI) based on the data in the NCREIF database. Because the fundamental asset of the two investment types are the same, it seems reasonable to assume that they should be related in the long run. In the short run there are, however, several investment-vehicle specific reasons why this need not be the case. For example, REITs are publicly listed on stock exchanges, and are thus expected to share a lot of commonalities with other publicly traded stocks. This is in fact also found by Goetzmann and Ibbotson [1990], Ross and Zisler [1991], and Myer and Webb [1994]. The fact that REITs are traded on exchanges makes them more liquid than direct real estate investments, and investors might therefore accept a lower risk premium for holding REITs, than for holding direct real estate. However, the lower contemporaneous correlation between direct real estate and the general stock market gives direct real estate a diversi cation benefit that may make investors accept a lower risk premium for investing in direct real estate.