EPRA study shows diversifying power of property stocks
Property stocks offer good diversification benefits across a range of major investment asset classes, but appear to be particularly interesting to investors in government bonds, shows an extensive correlation study commissioned by the Amsterdam-based European Public Real Estate Association (EPRA).
'Correlation, or to be more precise lack of correlation, lies at the heart of many institutions' asset allocation policy. EPRA wants to encourage a wider understanding of how real estate and real estate securities perform,' said Paul Rivlin, Chairman of EPRA's 'Broadening the Investor Base Committee' and Joint Chief Executive of European Real Estate Investment Banking at Eurohypo.
The research, published under the title: 'EPRA Broadening the Investor Base Study - Correlations of Property Stocks with other Asset Classes,' was carried out by Professor Steffen Sebastian of the International Real Estate Business School at the University of Regensburg in Germany.
The study investigated rolling correlations in periods of five years for the quarterly returns of the FTSE EPRA/NAREIT Global Real Estate index series against three classical asset classes: equities, bonds and money (treasury bills), and five alternative assets classes, including direct real estate, emerging market stocks, hedge funds, private equity and commodities.
The association's European total return index of property stocks was included in the study, as well as national indices for the U.S., UK, Australia, France, Sweden and the Netherlands.
'For all asset classes, we see that property stocks show correlations significantly below 1.0 - and in some cases we got negative readings - which indicates the good diversification benefits of investing in real estate equities for a mixed asset portfolio,' Professor Sebastian said.
'The story is clear that from 2000 onwards the correlation between the FTSE EPRA/NAREIT Global Total Return Index for property stocks with bonds became quite negative, after being relatively stable throughout the 1990s,' he added.
'It is not possible to draw a direct causal link from a correlation study, but this is probably related to the decline in global interest rates after 2000. It does seem, however, to make property stocks an interesting diversifier for conservative bond investors for say 5% of their portfolios.'
Professor Sebastian said the average correlation between property sector stocks and stock market indices is low at about 0.5 over the 13-year period of the study between 1994 to 2006. This makes listed property a good diversifier towards general equities, but he added that there appeared to be a trend towards greater correlation of real estate shares and stock indices in the past few years.
'The correlation between the EPRA euro index and stocks has fluctuated quite a lot and was quite high in the 1990s, but it appears to be stabilising towards the 0.5 area like the UK. One interpretation could be that the European market is getting more mature, as property stocks have become quite fashionable and equity analysts are focusing on them more, accompanied by the increase in capital flows into the sector,' he added. 'Property stocks have for a long time been a specialist area and it now appears they are becoming a classical investment.'
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