Empirical Modeling of Direct Real Estate Ex Ante Systematic Risk and Total Risk Behavior under the Duration Risk, Time-varying Risk and Garch Risk

Ho Kim Hin/David¹, Li Yun/Max^2
(1. Department of Real Estate, School of Design and Environment, National University of Singapore, Singapore;
2. School of Economics and Finance, Auckland, New Zealand)

Abstract: Based on well-established financial theories like duration, convexity, the CAPM and the real estate equivalent yield model, this paper investigates a model for the ex ante measurement of the direct real estate systematic risk and direct real estate total risk, in terms of the non-linear exposure to movements in the direct real estate yield. Empirical validation is conducted to estimate the direct real estate duration beta and the time-varying beta, within the context of Singapore’s real estate market that comprises the luxury residential, prime office and retail sectors. With the aim to estimate the direct real estate total risk, this paper restructures the resulting and ex ante direct real estate modified duration model and it assesses the measurement in comparison with a GARCH (generalized autoregressive conditional heterogeneity) risk model. The ex ante direct real estate modified duration model has the potential to measure the real estate systematic and total risk in an expectation form. The test of duration beta against the time-varying betas reveals that the time-varying betas tend to be over-stated. It reveals that the luxury residential sector and prime office sector are inclined to move in opposite direction in terms of both the duration beta and time-varying beta. This has significant meaning for real estate investors while making decisions on asset allocation and portfolio management.

Key words: direct real estate systematic risk; total risk; real estate duration beta; time-varying beta; GARCH risk model and Singapore real estate market

JEL code: R1