Academic Alpha: Real Estate and Stock Returns

Academic Alpha: Real Estate and Stock Returns

December 19, 2011 Research Insights
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(Last Updated On: January 13, 2017)

The following summary is from our academic alpha database at

Title: Corporate Real Estate Holdings and the Cross Section of Stock Returns

Authors: Selale Tuzel

Category: Equity alpha

Alpha: .50-.75%

Alpha remarks: Table 6 suggest an annual alpha of 8.22%, ~68bp monthly, for VW long/short portfolios

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Readability: 4

Blog link: N/A


This article explores the link between the composition of firms’ capital and stock returns. I develop a general equilibrium production economy where firms use two factors: real estate and other capital. Investment is subject to asymmetric adjustment costs. Because real estate depreciates slowly, firms with high real estate holdings are more vulnerable to bad productivity shocks and hence are riskier and have higher expected returns. This prediction is supported empirically. I find that the returns of firms with a high share of real estate capital exceed that of low real estate firms by 3–6% annually, adjusted for exposures to the market return, size, value, and momentum factors. Moreover, conditional beta estimates reveal that these firms indeed have higher market betas, and the spread between the betas of high and low real estate firms is countercyclical.


  1. Compute Rental Expense/Gross PPE and eliminate firms with greater than 5%
  2. Compute the RER for every firm: RER= (building & cap leases/PPE(firm) – building & cap leases/PPE(industry))
  3. Go long Higher RER  firms and go short low RER firms
  4. Capture a 8.22% annualized alpha (see table 9)
  5. Make money


  • Equal-weight results show alphas in the 4-6% range for all quintiles, suggesting that the effect might be driven by large firms.
  • Alphas are small, especially when they are industry-adjusted (see table 7)
  • Alphas can be enhanced if the investor excludes firms that have rental expense/Gross PPE that is greater than 5%.

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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.