VALUE VERSUS GROWTH PROPERTIES

Abstract

The study applies the value-growth paradigm to real estate to ascertain the relative superiority of contrarian real estate investment. After the literature review, a portfolio of 73 regions (Office Sector); 52 regions (Industrial Sector); and 48 regions (Retail Sector) within the U.S, Australia, New Zealand and nine Pacific Rim Countries from 1985Q1-2005Q3 (for the Office and Industrial Sector); and from 1992Q1-2005Q3 (for the Retail Sector) are examined. It was found that on the average, contrarian investment strategy is superior to growth investment strategy. Using the initial yield to classify value and growth properties, value properties outperformed glamour properties for all three sectors in all investment periods. Also, on average, value strategies are no riskier than glamour properties for the office and industrial sector using conventional approaches and stochastic dominance test. Furthermore, superior returns from value office and industrial properties are due to mean-reversion tendency and the exploitation of the suboptimal behaviour of the typical investor that consistently overvalue growth properties over value properties. For the retail sector, value strategy is riskier than growth strategy using conventional risks measure, but this evidence was overturned using risk measures on performances in down markets and stochastic dominance test. Mean-reversion tendency is also not detected; however, there is evidence that direct extrapolation leads to the superior return of retail value properties.