In the pantheon of inefficient markets, one might expect commercial real estate to shine above all others.  After all, buying and selling real estate (actual real estate, not REITs), can incur significant transaction costs, the market for real estate is heterogeneous and there is no single real estate marketplace to provide efficient  pricing.

So does it follow that the management of commercial real estate investments offer up some juicy alpha opportunities?  That’s the question posed in a study by Shaun Bond of the University of Cincinnati and real estate consultant Paul Mitchell called “Alpha and Persistence in Real Estate Fund Performance”.

While other research has addresses the performance of real estate-focused mutual funds, this study uses multi-factor analysis to examine the alpha generated by large institutional investors in commercial property in the UK (pensions, insurance companies and the like).  In other words, Bond and Mitchell apply techniques that AllAboutAlpha.com readers will find quite familiar.

Persistence

One of the hallmarks of an alpha producing fund is return persistence – serial positive (or negative) returns that chance alone could not have produced.  A top quartile manager that remains in the top quartile for successive periods is said to be persistent.

But when Bond and Mitchell examine top quartile managers, they find that persistence seems to be dependent on the time frame examined.  For example, top performing managers in 1992 fell back to the mean immediately and by 1993 had rejoined bottom quartile managers. More…