Summary of the Value vs Growth Real Estate Investment Strategies

What is it about?

This paper investigates the comparative advantage(s) of the value and growth real estate investment strategies, in order to ascertain the credibility of the risk-based explanation for the value premium. Results indicate that value portfolios for the office and retail real estate sectors generally outperform growth portfolios, over all holding periods under consideration.

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Why is it important?

Results of the time-varying risk analyses (based on the beta premium and the beta-premium sensitivities), generally do not provide support for the risk-based explanation for the value premium anomaly. Results of the beta-premium sensitivities analyses, in particular, generally contradict the time-varying risk hypothesis. This is supported by the results of the conditional market regressions, which show that the CCAPM cannot explain the value premium anomaly. Given that the results are consistent with several studies on common stocks, this paper cannot contend that the results are a function of the peculiar nature of real estate and the market in which it is traded. However, it may well be noted that the peculiar nature of real estate (i.e. illiquidity, lumpiness, etc.) persists in conjunction with its real estate market imperfection. Therefore, the impossibility of short selling, arbitraging, etc. may well lead to more expectation errors on the part of real estate investors than the common stock market investors. This could be the reason why the results of the naıve extrapolation test generally indicate that overreaction and the naıve extrapolation of past performance, is a credible explanation for the superior performance of value real estate investment strategy, especially for the retail real estate investment strategy.

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