Real Estate Exposures to Bond and Equity Return Drivers

We evaluate listed and unlisted real estate asset classes from the perspective of an investor holding a diversified equity and fixed income portfolio. We analyse the exposures of real estate returns to common macro drivers: expected cash flows, inflation, real interest rates, and risk premiums. Listed and unlisted real estate share similar exposures to these drivers, which is not picked up by traditional spanning regression approaches.

We 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.

This publication illustrates how decomposing asset class returns helps us link them to macroeconomic outlook. It also shows how private assets can be consistently evaluated alongside liquid asset classes and segments.