Real Estate Exposures to Bond and Equity Return Drivers

The authors evaluate listed and unlisted real estate asset classes from the perspective of an investor holding a diversified equity and fixed income portfolio. They analyze the exposures of returns to fundamental drivers of equity and fixed income returns: expected cash flows, inflation, real interest rates, and risk premiums. Listed and unlisted real estate share similar exposures to drivers, which is not picked up by traditional spanning regression approaches. They find that both segments of real estate hedge inflation risk, in contrast to broad equities and nominal bonds. In addition, listed real estate has a higher exposure to transitory risk premium shocks. These findings help explain the higher correlations between listed and unlisted real estate at longer horizons, and lower long-horizon correlations between real estate and the broad equity market.