The Role of Risk Measuresí Choices in Ranking Reits: Evidence from the US Market

Abstract

The increasing role of retail investors in the real estate vehicle market makes necessary to study simple return/risk measures that could be easily understood also by not financial skilled investors. Measures frequently used in the asset management industry are the Risk Adjusted Performance Measures scale independent. Studies available in the real estate literature evaluate the usefulness of this approach in order to select best investment opportunities under the simplified assumption of the normality of results achieved. Looking at the US market, the paper studies the performance of REITs for the time period 1999-2010 and verifies that the assumption of the normality of the performance achieved is not satisfied. Demonstrated the limits of the assumption, the paper compares ranking based on Sharpe ratio with those achieved using different RAP measures constructed using different risk measures that do not assume the normality of the returns' distribution. Results demonstrate that rankings obtained by different risk measurement approaches are not always coherent even if they are correlated. RAP measures constructed using the maximum drawdown and the VaR risk measures allow to identify rakings that are more stable over time respect to the Sharpe index. Looking at the determinants of RAP values, the general & administrative expenses, the role of the real estate investment, the debt and the volume are the main drivers of all ranking constructed. For the liabilities the main feature that affects the ranking is the mismatch between short term assets and debts while for the volume the more significant variable is the one that considers the volume adjusted for the bid-ask spread. Considering the determinants of the RAP measures, we cannot identify any significant change in the ranking determinants on the basis of the risk measurement choice. Finally we evaluate the relevance of the RAP rankings in selecting the investment opportunities comparing the results of a naïf diversified portfolio with those achieved by a portfolio concentrated only on top REITs identified using different RAP measure. Results demonstrates that the choice to consider more complex RAP measure could increase of the performance achieved by a diversified REITs' portfolio.