The Cross Section of Expected REIT Returns

Abstract

In this study, we examine the cross‐sectional determinants of expected REIT returns. We examine both the pre‐ and post‐1990 periods, since the structure of the REIT market changed substantially around 1990. The determinants of expected returns differ between the two subperiods. In the pre‐1990 subperiod, momentum, size, turnover and analyst coverage predict REIT returns. In the post‐1990 period, momentum is the dominant predictor of REIT returns. Given the strength of the momentum effect in the post‐1990 period, we examine it in great detail. For the whole period, and for the post‐1990 period where the momentum profit is strongest, our evidence is generally consistent with the studies on common stocks other than REITs. The only striking exception is that we find that momentum is stronger for the larger REITs rather than for the smaller REITs. In our multiple regressions that include the characteristics as well as interactions between past returns and firm characteristics, the turnover–momentum interaction effect provides the most significant results. More specifically, momentum effects are stronger for more liquid REITs.