'REITarization' Effects on Global Real Estate Markets

Abstract

The creation of real estate investment trusts (REITs) facilitates the conversion of illiquid commercial real estate assets into liquid tradable securities in the public market space. The process increases liquidity and generates significant growth in cross-border real estate transactions. This study uses a large sample of proprietary commercial real estate transactions data from more than 73 countries within the sample period of 2001 through 2015. We investigate the impact of REIT creation on international real estate capital flows. Using non-REIT countries as the control group, we show that REITs open a new channel to attract institutional investments in real estate. New investments in real estate by both local institutional investors and foreign investors increase in REIT countries relative to non-REIT countries. The results imply that there is no substitution effects of REITs on private real estate market activities. We also find no evidence of “crowding out” effects on local investors, as we do not observe significant changes in the outflows of real estate capital. The relatively large increases in domestic real estate investments have caused declines in the shares of cross-border real estate capital flows in the post-REIT regime.