Persistence of real estate factors in equity markets
There is significant and highly persistent component of real estate factors in listed equity markets that investors can target in a consistent and repeatable way to harvest alpha in listed real estate securities allocations irrespective of equity market conditions.
The Kania Global Real Estate CAI Index, an alternative beta index based on factors relevant to real estate and real estate securities and not general equity market factors, has generated significant and consistent live outperformance to benchmark of approximately +430bps per annum, consistently over 1-, 3- and 5-year periods.
We have covered the importance of applying specific real estate factors here Get your Fact(or)s right, how investors can boost alpha in their REITs allocations — Kania Advisors and the consistency of alpha generation irrespective of equity market conditions here Consistency, consistency, consistency in REITs alpha generation — Kania Advisors highlighting outperformance in each major phase that markets have been subject to over the past 5 years of live Index performance (pre-COVID, COVID downturn, post-COVID recovery and interest rate hiking period).
Another way to evaluate the persistence of alpha generation is to consider individual rebalancing periods. The index rebalances semi-annually, which means that irrespective of market conditions, volatility, news flow, credit conditions, sentiment and many other dimensions and complexities of the market, at each rebalancing a portfolio is created that is held without change until the next rebalancing 6 months later. In the past 5 years, there have been 10 live rebalanced portfolios that can give insight into the persistence of real estate alpha capture in listed markets. The results based on those 10 portfolios are;
7 semi-annual portfolios generated positive outperformance to benchmark and 3 underperformed, resulting in a 70% success rate or 2.3:1 ratio
there is a significant positive skew with the magnitude of relative outperformance of positive return portfolios being significantly higher than the magnitude of relative underperformance of negative return portfolios.
Positive portfolio return of 3.3% relative to benchmark over a 6 month period compared to negative portfolio return of -1.1%, a magnitude of 3:1
The results illustrate that there is strong persistence of real estate factors in listed real estate markets irrespective of equity market conditions that can generate highly repeatable outperformance. In addition, exposures that directly target real estate factors help to construct risk controlled portfolios that generate significantly higher positive performance while limiting any downside risks.
Investors can benefit from allocations to listed real estate securities that provide targeted exposure to persistent real estate factors through well structured systematic strategies and harvest consistent and repeatable alpha irrespective of equity market conditions.
For further information about the index and factors, please contact info@kaniaadvisors.com.
About Kania Advisors
Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process