Revisiting Non-normal Real Estate Return Distributions
by Property Type in the U.S.
Michael S. Young
Published online: 22 August 2007
Springer Science + Business Media, LLC 2007
Abstract In this updated empirical analysis, investment risk models with infinite
variance are more descriptive of distributions of individual property returns in the
NCREIF database over the period 1980 to 2003 than Normally distributed risk
models. Real estate investment risk is heteroskedastic, but the Characteristic
Exponent of the investment risk function is nearly constant across time although
differences among property types are evident. Accordingly, asset diversification is
far less effective at reducing the impact of non-systematic investment risk on real
estate portfolios than in the case of assets with Normally distributed investment risk.
The patterns found in the U.S. are the same in Australia and the United Kingdom,
and the Characteristic Exponents are virtually identical across all three countries.
Keywords Real estate
The data and analysis of this note extend the research presented by Young and Graff
(1995) with corrected data from the 1980 to 1992 period; new data from the 1993 to
2003 period; comparisons among U.S., U.K., and Australian return distributions; and
more discussion of implications of the findings. That earlier work presented an
empirical analysis of the distributional characteristics of cross-sectional annual
returns of individual assets contained within the NCREIF Property Index from 1980
through 1992, in the aggregate and disaggregated by property type. The authors
found that cross-sectional annual returns were not Normally distributed during any
calendar year studied. Additionally, the authors found that both skewness and the
magnitude of real estate risk changed over time, i.e., was heteroskedastic.
Now, with the passage of time across a wider range of macroeconomic conditions,
this work can be extended to 2003. For consistency and comparability, the method-
ology of this paper is identical to the 1995 study. Also, the identical methodology
J Real Estate Finan Econ (2008) 36:233–248
M. S. Young (*)
35 Creekside Drive, San Rafael, CA 94903, USA