Abstract

This paper analyses the response patterns of US direct and listed real estate returns to shocks in market fundamentals. Response speeds are estimated with VAR models using Transaction Based Indices (TBI) and NAREIT returns for the period 1994-2009. To avoid the potential influence of different property mixes and of leverage on the dynamics, we use sector level data and deleveraged NAREIT returns. REIT returns are found to lead TBI returns regardless of the property sector; this lead-lag relationship being due to the sluggish reaction of the TBI returns to unexpected changes both in the fundamentals and in REIT prices. The findings suggest that the lead-lag relations cannot be explained by the potentially slower adjustment of sellers’ reservation prices than of demand in the direct real estate market. In the office and retail sectors, securitized real estate returns lead direct market returns even when catering for the ‘escrow period’ in the direct market; while in the apartment and industrial sectors, the escrow period may explain the lead-lag relation.