The Dynamics of REIT Capital Flows and Returns

This study examines the effects of capital flows into the REIT sector on REIT returns and, simultaneously, the effects of REIT returns on subsequent REIT capital flows. The dynamic relation between REIT capital flows and returns is estimated using vector autoregression (VAR) techniques. Unlike static regression techniques, our dynamic model produces estimates of the short-run relationships, long-run relationships, impulse response functions and forecast variance decompositions. We find evidence that REIT equity flows are significantly positively related to the prior quarter's flows and negatively related to flows from two quarters ago. The evidence on the responsiveness of flows to prior returns is time-period specific. In the important post-1992 subperiod, REIT returns do not significantly affect REIT flows in any of the VAR model specifications. Simultaneously, REIT capital flows do appear to have a significant influence on equity REIT returns.