This paper utilizes the Carlson, Titman, and Tiu (2010) model of REIT returns to estimate the strength of the relationship between REIT and underlying real estate returns. Our work further offers an innovative method for computing the returns of the real estate properties underlying each REIT using the Moody’s/REAL commercial property price indices by region and property type. We find a statistically significant relationship between REIT and real estate returns only in the office sector. Other property types offer only very weak and insignificant relationships. This finding suggests that direct real estate investment or investment through the property price index derivatives cannot be replicated using REITs.
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