Global REIT: Not Price But Income Correlations

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

March 2006

We have recently looked at some very broad data on REIT (and real estate company) returns globally based on information found in the website of National Association of Real Estate Investment Trusts (NAREIT). A few correlative calculations were made and here are a few general notes and interesting observations: 

A)     The data series = are yearly based and start from 1996 and end at January 2006. Hence, the figures for 2006 are reflective of the first month only.

B)     The return comprises of two components = REIT / real estate company price returns, whether increases or decreases, and their income returns.

C)    The geographical / regional markets are three = namely North America, Asia, and Europe.

D)    Price returns = there is little or no significant correlations between the 3 regional markets with North America to Asia being the weakest (R2 = approximately 0.12) and Asia to Europe being somewhat relatively stronger (R2 = approximately 0.36). In terms of percentage returns, they collectively cover a range spreading from a negative of -32% to a positive of +47%. Also, the 3 curves seem to move more in tandem in and after 2002 than before it and correlations do show higher values than since 2002.

E)     Income returns = save for North America to Asia, there is significant / noticeable correlations in North America to Europe and Europe to Asia comparisons which R2 are roughly 0.59 and 0.71 respectively. Such correlations tend to be even higher after 2002 being at 0.79 and upwards.

F)     Price to income returns = the price and income returns of each individual regional market is also compared and correlated and interestingly, there is no significant relationship between the price and income components of each regional market. Even if only data since 2002 and beyond are used, the correlation is not overly significant except the one for Europe.  

G)    Inferences = it seems while the income return component (in terms of dividends etc) appear to have some degree of synchronization among regional markets, the price return component do not bear much significance to one another except in recent years. As to whether the recent more correlated trend is to continue or is just a temporary (or even by chance) condition remains to be observed. Given that the price return component of any market bears no or little relationship to the income return component of that market, one may speculate that prices for any market in general fluctuate without much regard to income, i.e. investors in general are more influenced by other perceptions or factors than income / dividend when they decide how much to pay to acquire a unit of REIT or an equity unit of a listed real estate company. This also synchs with the observation that for a steady income stream over time, the market may exhibit a more volatile (wider) spread of capitalization rate i.e. the market can sometimes be willing to pay a much higher price, occasionally in terms of several times more, for what is seemingly a steady and similar income stream.  

Price expectation and market perception notwithstanding other aspects still reign.

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