Risk Shift of Real Estate Stocks during the COVID-19 Pandemic

The outbreak of the COVID-19 pandemic induces an increase of risk in global equity markets where real estate stocks are often perceived as a ‘safe haven’. Employing the Fama and French’s (2015) five-factor model, we calculate the betas for risk factors and investigate the influence of market crises on excess returns of real estate stocks. The time series used in this study allows for splitting the data into two crisis periods namely the global financial crisis during 2007-2008 and the COVID-19 crisis in 2020. Our empirical evidence underlines that the undifferentiated view of real estate stocks as an overall ‘safe haven’ is not supported: 1) We find the risk factors of Fama and French can be applied to real estate stocks only to some extent, where the investment and profitability factors show opposite signs compared to general stocks; 2) Regional differences exist and Asian real estate markets show stronger diversification benefits during the crises; 3) Differences in business scopes lead to distinct reactions to the crises, where Asian firms focusing on real estate development and diversified activities are proven stronger during the COVID-19 pandemic and thus may offer better diversification value for investors; and 4) European real estate stocks are the worst-performing in terms of annualized return, specifically for firms offering real estate development and diversified activities. During both crisis periods, operating and services firms suffer a significant negative impact in Europe and are less likely to have diversification value