REITs and the Private Real Estate Market

Abstract

Financial economists have long been interested in the dual-market nature of real estate. Real estate is in a unique position among alternative asset classes in that an active market transacting commercial and residential real estate assets exists alongside public pricing and trading of real estate investment trusts (REITs) on the stock market. This chapter summarizes past research on how these two markets are connected and whether investors in REITs receive a return consistent with the direct real estate market. To investigate this issue, an analysis is conducted using multivariate cointegration techniques on a data set that includes the financial crisis of 2007-2008 and a carefully matched set of control variables. Researchers have previously used matched controls to address this issue. The findings suggest that REITs and the private real estate market adjust together toward a long-run equilibrium. Evidence also indicates that the financial markets lead movements in the real estate market