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Evaluating the Sharpe Performance of the Australian Property Investment Markets

Abstract The Sharpe performance is a commonly recognised measure for comparing the risk adjusted returns of competing investment classes. On the surface, Australian property investment markets, display good Sharpe performances with relatively solid returns and low risk profiles. However, the Sharpe performance formula neglects two important features typically displayed by appraisal based property returns: non-normality and autocorrelation. These both can lead to an underestimation of the true risk of direct property and so an overestimation of the associated Sharpe performance. On applying a number of adjustments to the traditional Sharpe ratio, this research examines the joint effects that autocorrelation and non-normality have on the risk-adjusted performance of direct property in comparison with shares and bonds. The results indicate that overall direct property still maintains its attractiveness and ranking even after the effects of non-normality and autocorrelation are taken into account.