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Real Estate Returns in Public and Private Markets

Working paper #470
Joseph Gyourko

The relationship between appraisal-based returns on the NCREIF Property Index and transactions-based returns on NAREIT’s Equity REIT Index is reexamined using new data from the modern REIT era. The lead-lag relationship first identified in Gyourko & Keim (1992) whereby current equity REIT returns predict future NCREIF returns is shown to still exist. Further analysis shows that it is the infrequent nature of the appraisal process that is behind this result. Moreover, one should not expect this relationship between private- and public-market returns to change unless appraisals became much more frequent. Finally, we examine the changing correlations of equity REIT returns with broader market indexes and conclude that the lower correlations with the S&P500 index and a small stock index reflect improved investor awareness of the true risk profile of a diversified portfolio of commercial real estate.

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