Do Common Risk Factors in the Returns on Stocks and Bonds Explain Returns on REITs?

The monthly returns on equity and mortgage real estate investment trusts (REITs) are analyzed over the period July 1976 to December 1992. The results indicate that risk premiums on equity REITs are significantly related to risk premiums on a market portfolio of stocks as well as to the returns on mimicking portfolios for size and book-to-market equity factors in common stock returns. Mortgage REIT risk premiums are significantly related to the three stock market factors and two bond market factors in returns. Also, mortgage REIT shares underperform by an average of 6.8% per year.     

Price Signaling and Return Chasing: International Evidence from Maturing REIT Markets

This article examines the liquidity of international real estate securities across 10 markets over the period 1990–2015. We apply and compare results for four different measures of liquidity, and find that while liquidity has increased consistently, wide variations still exist across markets, with the United States and Japan in the lead. Our results also suggest that the introduction of local REIT regimes did not have any pervasive effects on stock liquidity. When we study the relationship between liquidity and returns, we document new and consistent evidence for international return chasing behavior, whose pattern is a function of local market efficiency, listed real estate market maturity and stock ownership dispersion. The introduction of REIT regimes seems to weaken the importance of extra performance over and above general equity returns as investors tend to allocate funds to real estate securities within real estate rather than equity portfolios.     

The Fractal Structure of Real Estate Investment Trust Returns: The Search for Evidence of Market Segmentation and Nonlinear Dependency

This article presents a further test for market segmentation between the real estate market and the capital markets. We use rescaled range analysis developed in the fractal geometry literature to test for nonlinear trends in the returns series for different asset classes. We make three major conclusions: (1) the stock market displays tendencies consistent with a random walk, (2) portfolios of mortgage and equity REIT returns display tendencies consistent with a random walk and, (3) conditional upon the methods used, segmentation does not exist between different real estate markets and between the real estate and stock markets.     

REIT Stock Price Volatility and the Effects of Leverage

This article sheds light on several puzzling empirical observations. We examine the volatility implications of equity Real Estate Investment Trust (REIT) stock returns over the sample period from January 1985 through October 2012. We find a negative “leverage effect” in the pre‐ and post‐Greenspan era, but not during the Greenspan era (circa 1994–2006). We argue that the positive elasticity of variance with respect to the value of equity during the Greenspan era can be explained by a decline in the spread between the yield on commercial mortgages and 10‐year Treasuries, which triggered a wealth transfer from REIT equity holders to REIT debt holders. We also argue that the declining commercial‐mortgage‐10‐year‐Treasury yield spread during the Greenspan era allowed REITs to take on far more risk than most people realized. We then document that average REIT stock return volatility increased significantly in the 2007–2010 period in the midst of a historic decline in REIT stock prices. The results have significant implications for the good deal of interest and debate in the media over the status of REITs and whether equity REITs have become excessively risky relative to the returns they generate.     

How do institutional investors react to local shocks during a crisis? A test using the COVID-19 pandemic

We examine how institutional investors reacted to geographically dispersed local shocks during the early stages of the COVID-19 pandemic. A sample of real estate investment trusts (REITs) enables us to link two layers of geography: the locations of the assets in which the REITs were invested and the headquarters locations of institutional investors who owned REIT shares. We find that the institutional ownership of firms with an economic interest in the investors’ home markets declined more if those markets were heavily affected by the pandemic. In addition, the ownership responses to the COVID-19 shock were larger in those markets in which REITs had larger portfolio allocations and in markets that were home to the investors. Importantly, we find that nonpassive and short-term investors may have overreacted to the local shocks because their REIT portfolios subsequently underperformed relative to passive and long-term investors. Our study highlights the importance of geography in the formation of investors’ expectations during market crises.     

REIT Stock Market Volatility and Expected Returns

We study the relation between REIT stock volatility and future returns, focusing particularly on the financial crisis period of 2007–2009. There is ongoing debate about whether stock volatility can forecast future returns. Our findings suggest that REIT‐implied volatility is negatively related to contemporaneous stock returns; there is a significant positive relationship between REIT implied volatility and future stock volatility; and there is a significant negative relation between REIT implied volatility and future stock returns. Lastly, we develop trading rules based on REIT implied volatility to test whether these relationships are exploitable. The result suggests a potentially profitable trading strategy.     

Institutional Investors' Preferences for REIT Stocks

This article investigates the determinants of real estate investment trusts (REIT) portfolio investment and institutional REIT ownership using multivariate Tobit regressions. We contend that many institutional investors take larger positions in more liquid assets like REIT stocks, as compared with private real estate equities, because of liquidity considerations. Consistent with this contention, we find that liquidity constraints are significantly related to REIT portfolio investment by institutional investors. We also find that institutional investors have different preferences for REIT stocks than do other investors; they generally prefer larger, more liquid REIT stocks.     

Asset Location,Timing Ability and the Cross‐Section of Commercial Real Estate Returns

This study examines the sensitivity of equity REIT returns to time‐varying MSA allocations of REIT property portfolios. Using a large sample of individual commercial property holdings, we find significant cross‐sectional and time variation in REIT geographic exposures and the ability of these exposures to explain the cross‐section of REIT returns. We further find evidence consistent with REIT managers being able, on average, to time allocation decisions ahead of MSA outperformance. This effect is most prevalent in non‐gateway markets, varies significantly across MSAs and over time, and is concentrated in financially flexible firms with a more diversified geographic portfolio.     

The Role of Managerial Stock Option Programs in Governance: Evidence from REIT Stock Repurchases

This article examines the role of stock option programs and executive holdings of stock options in real estate investment trust (REIT) governance. We study the issue by analyzing how the market reaction to a stock repurchase announcement varies as a function of the individual REIT's governance structure. In particular, we examine how executive and employee stock option holdings influence the market reaction to a firm's announcement of a stock repurchase. Using a sample of REIT repurchase announcements, we find that the market reacts more favorably to announcements by firms where executives have larger option holdings and the chief executive officer is not entrenched. Our results with respect to the roles of stock option holdings of executives and nonexecutives differ from those reported for a cross-section of non-REIT firms. While we find evidence supporting the importance of executive stock options in aligning the incentives of management and reinforcing the positive signaling associated with a repurchase announcement, we find little evidence that the market views REIT repurchases as being used primarily to fund option exercise. We attribute these findings to greater dependence by REIT investors on internal governance mechanisms (such as stock option programs) as a result of regulatory restrictions that limit external monitoring such as hostile takeovers.     

Markov Switching Dynamics in REIT Returns: Univariate and Multivariate Evidence on Forecasting Performance

We document the presence of Markov switching regimes in expected returns, variances and the implied reward‐to‐risk ratio of real estate investment trust (REIT) returns and compare them to properties of stocks and bonds. Our evidence suggests that regime switching techniques are more successful over the period 1972–2008 than other time‐series models are. When the analysis is extended to a multivariate setting in which REIT, stock and bond returns are modeled jointly, we find that the data call for the specification of four separate regimes. These result from the absence of synchronicity among the regimes that characterize univariate REIT, stock and bond returns.     

Market Microstructure and Real Estate Returns

This paper examines the Real Estate Investment Trust (REIT) market microstruc-ture and its relationship to stock returns. When compared with the general stock market, REIT stocks tend to have a lower level of institutional investor participation and are followed by fewer security analysts. In addition, REIT stocks that have a higher percentage of institutional investors or are followed by more security analysts tend to perform better than other REIT stocks. Our results seem to confirm Jensen's ( 1993 , p. 868) proposition that ownership structure (that is, who owns the firm's securities) affects the value of the firm. Our findings also have implications about the well documented phenomenon that the financial performance of Commingled Real Estate Funds (CREFs) is better than that of REITs.     

Another Take on Real Estate's Role in Mixed‐Asset Portfolio Allocations

This article examines real estate's role in institutional mixed‐asset portfolios using both private‐ and public‐real estate indices, as a means of examining varying real estate‐related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest—using infinite‐horizon returns and all of the caveats that accompany such a perspective—that real estate allocations of approximately 10–15% of the mixed‐asset portfolio represent an upper bound for most investors. For those investors preferring low‐risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high‐risk portfolios, public real estate (with its embedded leverage of 40–50%) is the vehicle serving this allocation preference—with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate‐risk portfolios, an intermediate‐leverage approach seems optimal.     

Can Fund Managers Select Outperforming REITs? Examining Fund Holdings and Trades

Despite at least six empirical studies published since 2000 designed to assess fund managers’ Real Estate Investment Trust (REIT)‐selection ability, their skill remains in question. Unlike previous studies, we examine fund holdings and trades of REITs to answer this question. This approach allows us to explicitly account for portfolio rebalancing that alters REIT‐characteristic weights of fund portfolios. Results show that fund managers, after controlling for property type, size and momentum, generated significant positive alpha with their securities‐selection ability. To understand the sources of such ability, we examine whether fund managers who followed certain trading strategies outperformed relative to other managers. The potential trading strategies are based on public information related to geographic concentration, net‐asset‐value‐to‐price ratios, income and appreciation styles and leverage of the underlying REITs. Comparative and regression analyses show that none of the strategies fully explains why fund managers were able to select REITs that outperformed. We surmise that the outperformance mainly derives from the endemic abilities of managers to uniquely process REIT‐specific information and generate private valuation beliefs that lead to profitable investment decisions.     

On the Time-Series Properties of Real Estate Investment Trust Betas

The relation between real estate investment trust (REIT) returns and stock market returns is of significant importance to investors, practitioners and academics. The temporal properties of this relationship have a critical impact on the usefulness of REIT risk estimates and portfolio allocations to this asset class. Recent studies have suggested a decline in the market betas of equity real estate investment trusts (EREITs). This study applies a rigorous statistical test of the hypothesis that the market betas of EREITs have remained unchanged during the 1972 through 2002 time period. There is weak evidence of a downward trend in EREIT betas using a single-factor model; however, the hypothesis is not rejected when using a three-factor model.     

Performance of Pairs Trading Strategy in the U.S. REIT Market

We examine the performance of pairs trading in the U.S. REIT market compared with that in the U.S. general stock market over the period 1987 to 2008. The results suggest that the REIT market provided superior profit opportunities for this strategy over common stocks after accounting for the effect of the bid‐ask bounce between 1993 and 2000. This was likely because of the unique characteristics of REITs, which permitted the selection of good pairs of close substitutes and the structural changes that occurred in 1993 in the REIT market. The superior trading profits in REITs disappear after 2000.     

REIT Dividend Policies and Dividend Announcement Effects During the 2008–2009 Liquidity Crisis

Real estate investment trust (REIT) dividend policies and dividend announcement effects during the 2008–2009 liquidity crisis are examined. Multinomial logit results indicate that REITs with higher market leverage or lower market‐to‐book ratios are more likely to cut dividends, suspend dividends or pay elective stock dividends. These results imply that mitigating going‐concern risk is an important motive for REITs adjusting dividend policies during the crisis and support dividend catering theory where investor demand for dividends impacts corporate dividend policies. Moreover, REITs that cut or suspend dividends experience positive cumulative abnormal returns during the post‐announcement period after controlling for the potential influence from simultaneous funds from operation announcements. The positive market response over the post‐announcement period supports the notion that dividend decisions convey information to investors and is also consistent with the broad catering theory of dividend policy.     

Heterogeneous Investor Sentiment and Institutional Real Estate Investments

Commercial real estate investors differ in their sentiment due to factors such as market expertise, investment strategies and expectations about future market conditions. Focusing on the office market, we investigate whether investors with a multiasset investment focus such as pension funds or insurance companies rely on the sentiment of specialized real estate investors such as public REITs or private developers/owners as source of information in their investment decision‐making. Using disaggregated sentiment measures and vector autoregression (VAR) we find evidence that changes in REIT and private real estate investor sentiment lead to changes in institutional investor sentiment in the suburban office and office REIT market. Our findings suggest that institutional investors rely on the sentiment of specialized real estate investors to make real estate investment decisions. Our study contributes to the existing literature on sentiment in commercial real estate markets by emphasizing the heterogeneity of investor sentiment and introducing a disaggregated sentiment measure. We also contribute to the institutional herding literature.     

Exclusivity Contracts,Insurance and Financial Market Foreclosure

We study the trade‐off between the positive effects (risk‐sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton [ 1987 ] under risk‐aversion and show that although exclusivity contracts induce optimal risk‐sharing, they can be used not only to deter the entry of a more efficient rival into the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk‐sharing without distorting product market outcomes. Thus, risk‐sharing alone cannot be invoked to defend exclusivity contracts.     

A Different Look at Commercial Real Estate Returns

Commercial real estate makes up a relatively small percentage of most institutional portfolios, even though the existing literature has consistently reported attractive risk-return characteristics that would suggest much larger allocations. This discrepancy has been explained by a perceived lack of comparability between return series calculated for real estate and those calculated for other asset classes. Just as investors actively involved in the futures markets do not consider individual common stocks to be traded continuously, those active in the stock market do not consider real estate to be traded continuously. In both cases, adjustments to reported returns are necessary to achieve a degree of comparability. This study makes such adjustments, using sales data from properties that help comprise the National Council of Real Estate Investment Fiduciaries / Frank Russell Company (NCREIF/FRC) Index to generate a "transaction-driven" commercial real estate return series. Examination of the risk-return characteristics of this series shows that it is quite different from traditionally reported real estate return series and far more consistent with risk-return characteristics that have been reported for other asset classes.     

Risk and Return on Real Estate: Evidence from Equity REITs

We analyze monthly returns on an equally weighted index of eighteen to twenty-three equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973–87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs.
Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60% of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.