The Information Content of Real Estate Derivative Prices

The objective of this research was to assess whether forward returns implied by real estate derivative prices provide a more accurate measure of future real estate returns than a consensus forecast of industry experts. Implied returns derived from real estate derivative prices are often used by industry participants as forecasts of future returns, even though the theoretical justification for this is limited. Bond and Mitchell's analysis suggests that since the introduction of real estate derivatives in the U.K., real estate derivatives prices have provided a better indication of future returns than a consensus forecast. But most of this apparent superior performance can be attributed to publication delays with the consensus forecasts. When adjusted for publication delay, the information content of real estate derivatives is shown to be remarkably similar to the consensus forecasts. The authors also caution that as the market for real estate derivatives develops, a greater divergence may emerge between market forecasts and real estate derivatives prices.