Home • PRRES Inc. Journal • Read the Journal

Evaluating the Sharpe Performance of the Australian Property Investment Markets

Author/s: Stephen Lee, David Higgins

Date Published: 1/01/2009

Published in: Volume 15 - 2009 Issue 3 (pages 358 - 370)

Abstract

The Sharpe performance is a commonly recognised measure for comparing the risk adjusted returns of competing investment classes. On the surface, Australian property investment markets, display good Sharpe performances with relatively solid returns and low risk profiles. However, the Sharpe performance formula neglects two important features typically displayed by appraisal based property returns: non-normality and autocorrelation. These both can lead to an underestimation of the true risk of direct property and so an overestimation of the associated Sharpe performance. On applying a number of adjustments to the traditional Sharpe ratio, this research examines the joint effects that autocorrelation and non-normality have on the risk-adjusted performance of direct property in comparison with shares and bonds. The results indicate that overall direct property still maintains its attractiveness and ranking even after the effects of non-normality and autocorrelation are taken into account.

Download Full Article

Download the Full Article PDF

14445921.2009.11104286.pdf 14445921.2009.11104286.pdf (214kB)

Keywords

Autocorrelation - Non-Normality - Property Returns - Sharpe Ratios

References

  • Bernstein P, 2007, Capital Ideas Evolving, John Wiley, New Jersey.
  • Brown G and Matysiak G, 2000, Real Estate Investment: A Capital Market Approach, Prentice Hall, London.
  • Favre L and Galéano J-A, 2002, Mean-Modified Value-at-Risk Optimization with Hedge Funds, Journal of Alternative Investments, Vol. 5, p21-25.
  • Fisher J, Geltner D and Webb R, 1994, Value Indices of Commercial Real Estate: a Comparison of Index Construction Methods. Journal of Real Estate Finance and Economics, Vol. 9, p137-164.
  • Higgins D, 2008, Commingled Four Quadrant Property Funds: Creating an Investment Framework, Pacific Rim Real Estate Society Conference, Kuala Lumpur, January.
  • Higgins D , Ditrocchio N and Hughes N, 2008, Mapping the Australian Property Investment Universe, School of Property, Construction and Property Management, RMIT University, Working paper.
  • Lee S, 2008, Sharpe Performance by Property, Pacific Rim Real Estate Society Conference, Kuala Lumpur, January.
  • Lo A, 2002, The Statistics of Sharpe Ratios, Financial Analysts Journal, Vol. 58, p36-52.
  • IPD/PCA, 2009, IPD Australian Digest Q4 2008, Investment Property Databank, Melbourne.
  • Scott R and Horvath P, 1980, On the Direction of Preference for Moments of Higher Order than the Variance, Journal of Finance, Vol. 35, p915-919.
  • Sharpe W, 1966, Mutual Fund Performance, Journal of Business, Vol. 39, p119-138.
  • Sharpe W, 1994, The Sharpe Ratio, Journal of Portfolio Management, Vol. 21, p49-58.
  • Travers F, 2004, Investment Managers Analysis: A Comprehensive Guide to Portfolio Selection, Monitoring and Optimisation, Wiley Finance, New Jersey.
  • Weisman A and Abernathy J, 2000, The Dangers of Historic Hedge Fund Data, in Rahl, L., ed. Risk Budgeting, Risk Books, London.
  • Young M, Lee S and Devaney S, 2006, Non-Normal Real Estate Return Distributions by Property-Type in the U.K., Journal of Property Research, Vol.23, p109-133.