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Commercial real estate return distributions: a review of literature and empirical evidence

Lizieri, C. and Ward, C., (2000) Commercial real estate return distributions: a review of literature and empirical evidence. Working Papers in Land Management & Development. 01/00. Working Paper. University of Reading, Reading. pp37.

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This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

Item Type:Report (Working Paper)
Divisions:Henley Business School > Real Estate and Planning
ID Code:27217
Uncontrolled Keywords:Returns, distributions, normality, asset class
Additional Information:A revised version of this paper is now published as Chapter 3 of J Knight & S Satchell (eds) Return Distributions in Finance, Oxford: Butterworth-Heinemann
Publisher:University of Reading
Publisher Statement:The copyright of each working paper remains with the author. If you wish to quote from or cite any paper please contact the appropriate author; in some cases a more recent version of the paper may have been published elsewhere.


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