The specific risk of the UK real estate securities market

Abstract

Purpose

Evaluation of risk/return relationship in public real estate market in the UK is vital for investors. In particular sector risk is being assessed, which is increasingly important due to expansion of index linked investments. The aim of this paper is to assess the risk inherent in public real estate securities.

Design/methodology/approach

To extract the specific/systematic risk from UK FTSE Real Estate Index (FTSERLT), the single index model (SIM) is employed over the period 1986‐2003. Four benchmark indices are used for this purpose in line with previous studies. The main part of the analyses is to find the index which best distinguishes between the systematic and specific factors affecting the real estate index. Monthly data are collected and grouped into one‐, three‐ and five‐year periods so that short‐ and long‐term trends are better observed and identified.

Findings

The findings show that the link between FTSERLT and all four indices has been declining over the observed period. In addition, it is noticed that the high and irregular specific risk levels in the sector over the last 15‐year period have created some form or “risk cycle”. In case of downturn on the market, it is identified that public real estate is more vulnerable than private market due to its high liquidity. This is identified as a major threat to its long‐term sustainability.

Originality/value

A unique breakdown of specific and systematic risk has been given based on three different duration periods and four benchmark indices. A particular attention has been given to the periods characterized with greater specific risk element. The paper has supported the existence of the “common real estate risk element” between public and private markets by establishing a strong correlation between public and private markets by establishing a strong correlation between the performance of direct real estate monthly market index (IPDMI) and abnormal performance (Alpha) of the public real estate sector.

Citation

Kovac, V. and Lee, S. (2008), "The specific risk of the UK real estate securities market", Journal of Property Investment & Finance, Vol. 26 No. 5, pp. 399-417. https://doi.org/10.1108/14635780810900260