Public versus Private Real Estate Equities: A More Refined, Long-Term Comparison

This paper compares public and private real estate equities. In so doing, we control for three of the main differences between these investment alternatives: property-type mix, leverage and appraisal smoothing. With these two restated indices, we then ran tests to determine in a statistical sense whether the restated means and volatilities of the two series were different from one another. The clear answer is that they were not. The results of the statistical tests combined with the fact that the average difference between the two (restated) return series has substantially narrowed (to approximately 60 basis points) in the more recent (1993-2001) period jointly suggest a seamless real estate market in which public- and private-market vehicles display a long-run synchronicity. This has important implications for portfolio management: First, public- and private-market vehicles ought to be viewed as offering investors a risk/return continuum of real estate investment opportunities. Second, while the