Connectedness structure of Pan-European Equity REITs

ABSTRACT

This paper examines the interconnectedness among European equity REITs (Real Estate Investment Trusts) due to increased financialization of the real estate sector and European economic integration. It uses two models, Diebold and Yilmaz's generalised variance decomposition and Barunik and Krehlik's time-frequency dynamics framework. The study covers a sample of 42 Pan-European REITs over a 15-year period from 2004 to 2018 and finds that the connectedness among REITs is influenced by the geographical location and performance of commercial real estate sub-sectors. The dynamic analysis shows that the source of shocks does not determine the persistence, but rather how the markets interpret the shocks during high-frequency intervals. The paper concludes that the connectedness structure among REITs reflects uncertainty interaction, with some effects observed mainly at high frequency levels, and few unexpected shocks found in the long-term stability of REIT returns.

KEYWORDS:

• REITs connectedness
• volatility spillovers
• REIT pricing dynamics
• real estate connectedness
• variance decomposition
• vector autoregression

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Source: Bloomberg.

2. Euronext Paris, Euronext Amsterdam, Euronext Brussels, London Stock Exchange Group (London & Milan), BME Spanish exchanges, and Deutsch Borse.

3. Stands for ‘Least absolute shrinkage and selection operator’

4. estimation done with R x64 3.5.2 using BigVAR package https://cran.r-project.org/web/packages/BigVAR

5. estimation done with R x64 3.5.2 using Model Confidence Set package https://cran.r-project.org/web/pack ages/MCS.

6. estimation done with R x64 3.5.2 using frequencyConnectedness package https://github.com/tomaskrehlik/ frequencyConnectedness.

7. estimation done with Gephi x64 0.9.2 https://github.com/analyxcompany/ForceAtlas2

8. The float is the number of shares available for trading. Float is calculated by subtracting closely held shares (owned by insiders, employees, the company’s Employee Stock Ownership Plan, or other major long-term shareholders) from the total shares outstanding.

9. Source: SNL Financial.

10. Return on average assets; net profit as a percent of average assets.

11. All debt, senior and subordinated, as a multiple of equity.

12. Debt is a multiple of tangible equity.

13. MSCI is a leading provider of critical decisions Support tools and services for the global investment community.

14. Total (investment) return is the most important measure of overall investment performance used to compare different real estate assets across time.

15. Income return, or direct return, measures the income receivable in relation to the capital employed over a period. This measure is calculated net of all irrecoverable costs incurred by the investor (which will depend upon the terms of the tenant lease contracts in place).

16. Source: SNL

17. Net free cash flow as percent of market capitalisation.

18. Events with double quote are sourced from: Reuters.

19. Federal Open Market Committee.

Additional information

Notes on contributors

Naoufal Nassili

Naoufal Nassili holds a PhD in Economics and is a member of the LEDA research centre. His PhD research focuses on real estate investment prospects in an environment of abundant liquidity. He is currently employed as a data analyst for a consulting firm.

Arnaud Simon is a senior lecturer at DRM (Dauphine Management Research). Co-director of the Real Estate Management Center, his research focuses on real estate finance, real estate management, economic geography and development.

Richard Malle is Research & Innovation Director at BNP Paribas Real Estate. He is an Associate University Professor at the Cnam and teaches real estate economics at the Institute of Economic and Legal Studies (ICH) in Paris (since 2012). He is also a member of the scientific council of the Institute for the Financing of Real Estate Professionals (IFPImm) as well as of the Royal Institution of Chartered Surveyors (RICS). He is a Doctor of Management Sciences from Paris Dauphine University (2009).