N°24-49: The Volatility of Listed Real Estate in Europe and Portfolio Implications

This paper analyzes the time-varying volatility of European listed real estate returns across sectors and countries. We also examine whether volatility and the price to net asset value ratio dynamics can be exploited by tactical allocation schemes to improve the performance of a listed real estate portfolio and whether this affects the allocation to listed real estate in mixed-asset portfolios. Using GARCH models, we find that volatility shocks are synchronous across sectors and countries, albeit with differences in magnitude. The high-volatility regime of the global financial crisis lasts longer than that of the COVID-19 pandemic. All countries but Germany experience higher volatilities during the COVID-19 pandemic than during the global financial crisis, while the results across sectors are more nuanced. Our results indicate that implementing tactical asset allocation across sectors is beneficial for strategies that have stable and well-balanced allocations. However, tactical rebalancing across countries has overall a detrimental effect on performance. Tactical rebalancing leads to higher allocations to listed real estate in a mixed-asset portfolio when sectors are considered, while the opposite is true for countries. The allocation to listed real estate ranges from 4% to 26% when sectors are considered, while it is slightly higher for countries.