A Time-Varying Analysis of Abnormal Performance of UK Property Companies

The investment selection ability of property company managers is investigated using a time-varying model. The specialised nature of commercial property investment presents the opportunity for added-value and, therefore, abnormal performance. Property company share performance is evaluated using Jensen's measure of excess performance and employs Kalman filter estimated time-varying alpha and beta values. Over the period of analysis, 1980-1995, the majority of property companies analysed exhibited an enduring risk-adjusted under-performance profile, although this was not found to be statistically distinguishable from zero. For the few companies delivering positive abnormal performance this was also shown to be insignificant. The implication is that property company performance is not significantly different from a random buy-and-hold strategy. If investors believe that there are inefficiencies in the direct commercial property market, which offers opportunities for out-performance, it does not appear to be possible to exploit such inefficiencies indirectly by investing in property company shares