Characteristics of Real Estate Investment

Several papers have formalised the effect of limited information in equity markets. The literature relates to two main areas. One is the analysis of the effect of new issues and listings.12 The second deals with the effects of differential information on the risk assessment of 'low information' companies; see for example, Klein & Bawa [1976; 1977] and Barry & Brown [1984; 1985]. The general conclusion is that equities for which there is relatively little information are perceived as relatively more risky due to the greater uncertainty surrounding the exact parameters of their returns distribution. Klein & Bawa [1977] further suggested that, when there is a lack of information within a market and/or asset class, there is an increase in estimation risk which can reduce investment in them. The lack of quality information and uncertainty associated with the performance of real estate may therefore deter institutional investment, even where there are substantial diversification benefits to be gained.

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12References include Ibbotson [1975], Ritter [1984; 1991], Beatty & Ritter [1986], McConnell & Sanger [1987] and Muscarella & Vetsuypens [1989].