REITs and REOCs and their Initial Stock Market Performance: A European Perspective

Abstract

This study examines the widely known phenomenon of “underpricing” during the IPO process, which has been researched extensively in several studies. The focus is on the short-run to thirty days performance after the company has gone public. Whereas underpricing in the real estate sector has been well and thoroughly examined in the US (Buttimer et al., 2005; Bairagi & Dimovski, 2010), Australia and Asia, European studies in this field are scarce. Only Freybote et al. (2008) investigate 105 property companies, with the focus on the IPO cycle, and Brounen and Eichholtz (2002) examine property IPOs in British, French and Swedish Markets.The motivation to undertake a pan-European analysis on the underpricing of property IPOs is twofold. Firstly, as stated above, to the best of our knowledge, there is no European study of underpricing differences between real estate operating companies (REOCs) and REITs which includes the financial crisis in the sample period. Secondly, due to a growing number of listed real estate companies in most European countries, a pan-European study should provide clear evidence of IPO pricing in Europe in comparison to US studies.The unique sample consists of 132 European REOCs and REITs from 19 European countries over the period 2000-2015. The study is based on the methodology of Beatty and Ritter (1986) concerning ex-ante uncertainty. The initial returns are analyzed in terms of firm and IPO characteristics. Additionally, different IPO market phases are controlled for, particularly with regard to the financial crisis, which is part of the sample period. In summary, ex-ante uncertainty has an impact on the underpricing level, and a statistically significant difference between REOCs and REITs can be found. The results show that the European REOCs are on average underpriced by 5.05 percent and the REITs are underpriced with 2.10 percent.