Can Investors Hold More Real Estate? Evidence from Statistical Properties of Listed REIT versus Non-REIT Property Companies in the U.S.

Abstract

We examine the diversification properties of holding listed REITs versus listed property companies (LPCs). If holding LPCs in addition to REITs provides excess diversification benefits, this would imply that investors have a larger pool of real estate assets in which to invest. Preliminary tests, however, show they are not comparable enough to be direct substitutes for each other. In portfolio performance analysis, LPCs alone provide certain diversification benefits, but the gains are slightly lower than those provided by REITs alone. We find little, if any, additional gains from holding both assets simultaneously. Further investigation suggests a long-term cointegration relationship between these two assets that is driven by property market conditions, yield term structure, default risk premium, and institutional money funds flow. In the short horizon, we observe unilateral Granger causality running from REITs to LPCs, suggesting that REITs are the leading index, while LPCs are followers in the system. Overall, our findings suggest that LPCs widen the number of public real estate securities that can be used. However, they are not quite as effective as REITs in terms of diversification benefits.