IMPACT OF 9/11 ON US REIT RETURNS: FUNDAMENTAL OR FINANCIAL?, THE

International Journal of Strategic Property Management, 2006 by Gheno, Andrea, Lee, Stephen L

4. RESULTS

Columns 1 and 2 of Table 1 present the pre-and post-9/11 crisis variances of daily returns in the four REIT indexes. Columns 3 and 4 show corresponding variances of monthly returns (implied daily variances). Column 5 (Post/Pre) shows the ratios of the post-crisis daily variance (column 2) of returns to the pre-crisis daily variance (column 1). A Post/Pre ratio of 1.76 for the ALLREIT market as a whole indicates that the variance of daily returns rose by 76 % following the 9/11 crisis. Variances rose in two REIT types, EREITS (73 %) and MREITs (45 %), but fell by 7 % for HREITS. For the 4 REIT types, the average percentage increase in the variance of daily returns was 47 %. We use an F-test of variance equality to assess if variances are statistically different in the post-pre crisis periods, with all but HREITs showing significant increases at the 1 % level. In other words, 9/11 had a significant impact or return uncertainty for most REIT security process except Hybrid REITs (HREITs).

Column 6 (Post/Pre) shows the ratios of post-9/11 to pre-9/11 variances using the monthly returns from columns 4 and 3, respectively. As with the daily variances, monthly (implied daily) variances increased following the attack on the World Trade Centre by more than 7 % for ALLREITs and 11 % for EREITs, but fell by 3 % for MREITs and 45 % for HREITs and by an average 8 % overall. Using an F-test to assess if the monthly variances are statistically different in the post-pre crisis periods, none of the REIT indexes show a significant increase at the usual levels of significance. This suggests that the attack on the World Trade Center on 9/11 did not have a significant impact on the uncertainty on real estate securities in the US in the long term.

Tuluca et al (2003) argue that the increase in volatility in the post-9/11 period compared with the pre-9/11 period could result from either a fundamental change, due to information flows, or noise trading due to increased uncertainly which is transitory. Therefore, was the effect of the attack on the World Trade Center fundamental or transitory? In order to answer this question we compare the post-crisis increases in monthly (implied daily) variances (column 6) versus the post-crisis increases in daily variances (column 5), the results shown in column 7. As can be readily appreciated the increase in monthly (implied daily) market volatility for all the REITs markets was less than the actual daily variance, the largest decrease by HREITs (40 %) and the least by MREITs (33 %) with an average decline of 37 %. Thus, we conclude that the effect of 9/11 on real estate in the US was financial and transitory rather than fundamental and persistent.

5. CONCLUSIONS

The initial view of the terrorist attacks of 9/11 was that they would have a serious impact on the economy of the US in general and the New York in particular. However, with hindsight we can see that the US economy was already suffering and the 9/11 attacks did not have a significant effect on economic growth either nationally or in New York. Nonetheless, commentators argued that the effect of 9/11 terrorists attacks could be especially hard for real estate markets as it would raise uncertainty and so hurt the NOI of institutional investment-grade real estate, which suggests that the effects of the attack on the World Trade Center could be fundamental and long lasting for real estate securities. In contrast, others argued that when catastrophic events, such as the attack on the World Trade Center on 9/11, occurs investor risk aversion increases dramatically but that the increase is only short lived. This implies that the 9/11 attacks would have only a financial impact on real estate security returns and so would be transitory. In other words, the effects of the 9/11 attacks on real estate securities could be either financial and persistent or fundamental and transitory.