Real Estate Investment Trust Market Research Articles

International Real Estate Review

The four articles presented in this special issue of the International Real Estate Review were prepared for and presented at an international real estate symposium organized by DePaul University, which took place on 3-4 July 2012 at the Grand Hyatt Hotel, Macao SAR China. Each paper subsequently went through the typical review process of the International Real Estate Review. The four papers cover a wide range of topics, from the role of public markets in international real estate diversification, to international evidence on REIT (Real Estate Investment Trust) market anomalies, to house price inflation in China, and to evidence on the relative performance of private equity real estate joint ventures. The papers presented here generated spirited discussions at the conference. Those attending the conference offered helpful comments and suggestions.

CONTAGION AND DOWNSIDE RISK IN THE REIT MARKET DURING THE SUBPRIME MORTGAGE CRISIS

This study empirically tests the contagion effects in stock and real estate investment trust (REIT) markets during the subprime mortgage crisis by using daily stock- and REIT-markets data from the following countries and international bodies: the United States, the European Union, Japan, Hong Kong, Singapore, Australia, and the global REIT market. We found a significant and positive dynamic conditional correlation (DCC) coefficient between stock returns and REIT returns. The results revealed that the REIT markets responded early to market shocks and that the variances were higher in the post-crisis period than in the pre-crisis period. Evidence supporting the contagion effects includes increases in the means of the DCC coefficients during the post-crisis period. The Japanese and Australian REIT markets possess the lowest time-varying downside systematic risks. We also demonstrated that the “DCC E-beta” captures more significant downside linkages between market portfolios and expected REIT returns than does the standard CAPM beta.

Malaysia REIT: First Decade Development and Returns Characteristics

Real estate investment trust (REIT) is a niche alternative investment. Since its introduction in Asia at the turn of the millennium, the REIT market in the region has experienced phenomenal growth. In particular, the Malaysia REIT (M-REIT) market capitalisation has seen a spectacular growth of close to 20 folds from its inception in 2005 until end of 2013. This paper chronicles the development of the M-REIT market which is rather unique as it provides a common platform for the existence of both conventional and Islamic REITs. Empirical tests are also conducted to uncover the returns characteristics of the M-REIT market. M-REIT returns are significantly correlated with domestic stock markets but only weakly correlated with changes in interest rate, with long-term proxy having stronger impact than short-term proxy. The results from correlation analysis are further confirmed by regression testing which shows that M-REIT returns are most significantly driven by domestic stock market returns while only mildly by changes in interest rates and are not significantly driven by returns in regional REIT markets. These findings possibly imply that M-REITs (i) subscribe more to equity characteristics than bonds, (ii) are not ‘pure’ yield-play instruments, (iii) often regarded as long-term investment and (iv) may not be fully integrated with global and regional REIT markets.

Real Estate Investment Trusts in the Developed Countries

In this article, performance of239 real estate investment trusts (REITs) from 15 developed countries is analyzed according to their regional specific characteristics. This investment vehicle is rapidly spreading all over the world due to high returns it offers while being of low risk, and since the governments create special legislation. In 2013, there were around 30 countries where REITs can be created, so regional specifics of REITs' performance can be studied. USA has the oldest REITs market in the world with 133 trusts operating there. Popularity of American REITs is explained by the fact that they usually hold well diversified portfolios of property with stable income. This helped them rather successfully survive through the global economic crisis of2008-2010, but after that attracted close attention of institutional investors which has led to the creation of new bubble on the market. European REITs market has appeared recently, its development being slowed down by the recent crisis. The debt crisis and liquidity strain caused REITs lack of funds; economic downturn led to the reduction of trusts' returns, resulting in the outflow of the investment to the USA. In 2012, the recovery of the debt capital market reanimated the REITs market. REITs in the Asia-Pacific region are very risky thus offering a high riskpremium. Their returns are unstable and fluctuate in line with the global economic situation. After the crisis, REITs have been the most attractive investment vehicle on the market offering high yield.

Information Diffusion in the U.S. Real Estate Investment Trust Market

This study examines the information diffusion process in the U.S. Real Estate Investment Trust (REIT) market with a focus on the impacts of changing market environments, information supply, and information demand on the lead-lag effect. The results suggest that a significant lead-lag relationship exists between the lagged returns of big REITs and the current returns of small REITs. This relationship has slightly decreased along with policy and environment changes that occurred in the U.S. REIT market during the study period from 1986 to 2012, while still remaining significant in the most recent REIT market. The process of information diffusion is becoming unstable in recent years and the reverse lead-lag effect from small REITs to big REITs is observed especially when REIT market liquidity and return volatility are high. The lead-lag effect among REITs is driven largely by slow adjustment to negative information, which is magnified by a lack of information supply, especially as demand for such information increases. Finally, information flow from REITs with more media coverage to those with less media coverage becomes even more sluggish than the information flow from big REITs to small REITs.

Effects of monetary policy on the REIT returns: Evidence from the United Kingdom

In this paper, we analyze whether a monetary policy based on three main variables (inflation, money supply, and output gap) has a nonlinear impact on real estate investment trust (REIT) markets. In addition, we extend our analysis to examine whether these monetary policy components impact the possibility of boom and bust regimes occurring in the market. Empirically, we propose different Markov-switching model variants to determine the nonlinear time-varying impact of monetary policy on the REIT market. Our results show the monetary policy environment is supposed to affect, on one hand, the REIT returns and, on the other hand, the possibility of boom and bust markets. We prove that expansionary monetary policy has an impact only in the case of boom market. However, an increase in the inflation rate decreases the probability of remaining in the bust regime. As a consequence, we have already outlined several monetary transmission mechanisms that show house prices to have important effects on aggregate demand. Our results confirm that REIT markets are not efficient.

Expected return, time-varying risk, and hedging demand in the US REITs market

This paper explores the time-varying relationship between the return and risk for the portfolios in the US real estate investment trusts (REITs) market. Three classes of REITs portfolios are sorted on size, momentum and book-to-market. The empirical results place a positive trade-off between the return and predictable covariation in all REITs portfolios. Furthermore, this paper examines the significance of intertemporal hedging demand in each REITs portfolio by extending the Intertemporal Capital Asset Pricing model (ICAPM) with a set of prevailing macroeconomic variables and financial market indicators, which indicate that the predictable movements in return could be attributed to the change in covariances with these innovations. The conclusive results show that innovations in inflation rate, de-trended short-term interest rate, Fama-French momentum factor, S&P/Case-Shiller home price index, and Barclay Capital long-term government/corporate bond index play a crucial role in hedging demand for REITs portfolios.

Examining volatility spillover in Asian REIT markets

This article provides international evidence on the effects of volatility spillover in Asian real estate investment trust (REIT) markets. Six Asian markets (Taiwan, Japan, Malaysia, Singapore, Hong Kong and South Korea) are examined through the generalized autoregressive conditional heteroscedasticity (GARCH) model with exogenous variables in the variance equation. Results show a negative spillover effect from the stock to REIT market, but a positive spillover from the bond to REIT market. During the financial crisis from 2007 to 2009, the negative volatility spillover from the stock to REIT market is significantly enhanced. This suggests that a prosperous stock market would decrease conditional volatility in the REIT market and the effect is more pronounced during the financial crisis.

Adaptive market hypothesis: evidence from the REIT market

We tests two important implications for Real Estate Investment Trust (REIT) market efficiency from the adaptive markets hypothesis (Lo, 2004): first, market efficiency is not an all-or-none condition but is a characteristic that varies continuously over time; second, market efficiency is dependent upon market conditions. By using the automatic variance ratio test of Choi (1999), and the automatic portmanteau test of Escanciano and Lobato (2009), we confirm both implications for the US REIT market. The degree of REIT return predictability is found to be time varying. More specifically, it appears to be declining over time, which implies that the REIT market has become more efficient. Furthermore, we show that the return predictability is indeed influenced by market conditions. The level of market development appears to be the primary driver for REIT market efficiency. Other factors like inflation and the overall equity market volatility also have impacts. Finally, we demonstrate that the REIT regulatory ch...

Volatility clustering, leverage, size, or contagion effects: The fluctuations of Asian real estate investment trust returns

This paper analyzes the volatile behavior of index returns in the following Asian real estate investment trust (REIT) markets: South Korea, Singapore, Japan, Taiwan, Hong Kong, Malaysia and Thailand. It also analyzes the conditional volatilities of REIT returns and determines whether any volatility clustering, size, liquidity, or contagion effects exist in their fluctuations. The results indicate that all REIT returns have volatility clustering effects. Moreover, the behavior of the REIT returns in Singapore, Hong Kong, Malaysia, and Thailand are similar, with their fluctuations being caused mainly by the size effect. In Japan, South Korea and Taiwan, the REIT returns are mostly connected with the stock markets because of the contagion effect in these countries. Finally, the Japan REIT market is the most volatile, with its market returns being influenced by leverage, size, and contagion effects simultaneously.

The asymmetric price adjustment between REIT and stock markets in Asia-Pacific markets

This paper applies the threshold error correction model to examine the relationship for real estate investment trusts (REITs) and stock, and their asymmetric adjustment behaviors in six Asian/Pacific financial markets: Australia, Japan, Singapore, Taiwan, Korea, and Hong Kong. Our results show that there has been long-term equilibrium in REIT and stock indices in most of these markets. To earn exceptional profits, it is recommended that investors can sell (buy) the REITs when the indices of REITs are lower (higher) than equilibrium in Australia, Singapore and Taiwan; on the other hand, they should sell (buy) when the REIT market goes up (down) in Hong Kong and Japan. A causality test revealed that previous information about stocks predicted changes in the REITs in all the Asian/Pacific markets. One can also find that the lead–lag relationships are significant. The threshold EC model predicts two-way causality under both the regimes for the financial markets in most countries during all the sample periods. In addition, the adjustment speeds for the stock indices are faster than that for the REIT indices as disequilibrium occurs. This paper also finds that the previous mentioned trading strategies generally remained the same during the period of sub-prime mortgage crisis. However, the threshold EC model predicts one-way causality for both the regimes for the financial markets in most countries during this crisis period. In addition, we also find that the severe shock in REIT markets led investors in Australia and Taiwan to be more conservative during this period. The REIT indices had more effect on stock indices after the sub-prime mortgage crisis. According to the empirical results, we can infer that the degree of market imbalance and the occurrence of the sub-prime mortgage crisis induce the changes in the investment behavior of market participants.

A Review of the Noise Trader Model Concerning the NAV Spread in REIT Pricing: Evidence from the Pan EU REIT Market

Executive Summary. This study investigates whether divergences between share prices and the net asset values (i.e., ‘‘NAV spreads’’) of real estate investment trusts (REITs) may be explained by irrational noise trader sentiment. In order to gain a solid foundation to this approach, we review the according noise trader model (NTM) by De Long, Shleifer, Summers, and Waldmann (1990) and Lee, Shleifer, and Thaler (1991) and test its premises. Our methods are predominantly determined by the primal NTM and concentrate on panel regression methodology. The results confirm that the model's premises are given in the context of the NAV spreads of REITs. Thus, the prices of REIT shares may reflect noise trader sentiment aside from fundamentals.

REIT stock dividends: the policy and intra‐industry wealth effects

PurposeDuring the height of the financial/credit crisis of 2008, the US Internal Revenue Service issued temporary guidance that permits REITs (real estate investment trusts) to retain cash and pay “effective stock dividends” through 2009 to meet their income distribution requirement. The purpose of this study is to investigate the policy implications of this guidance on shareholders' wealth and the intra‐industry effects for non‐event, rival REITs when event REITs announced elective stock dividends.Design/methodology/approachThis study identified the announcements of the Revenue Procedures 2008‐68 and 2009‐15 and subsequent six equity REITs announcing the distribution of effective stock dividends in the first quarter of 2009. To assess their implications, this study adopted the event study methodology and multivariate regressions to examine the REIT price reactions and their distribution to the Revenue Procedure announcements and to the elective stock dividend announcements, respectively.FindingsThe Revenue Procedure announcements have positive wealth effects on the entire REIT market and REITs with higher leverage enjoy larger abnormal returns. During firm stock dividend announcement windows, non‐event, rival REITs have higher positive price reactions when the event firm and the non‐event firm are not alike and their returns have a low correlation coefficient, when the event firm has a large negative abnormal price reaction, and when the event firm pays cash/stock dividends in the mixture of 40 percent:60 percent, instead of 10 percent:90percent.Practical implicationsThe results will help REIT investors to make better decisions. This study produces important implications for investors to pick REITs which are likely to experience higher returns at periods of turmoil when announcements about dividend policy changes are expected.Originality/valueTo the best of the authors' knowledge, this is the first study looking into intra‐industry effects of REIT dividend announcements and the policy implications of the elective REIT stock dividends permitted by the US Internal Revenue Service. The results of this study show that the informational signals associated with these announcement events are rich and have intra‐industry implications on REIT share prices.

US Treaty Policy and Practices Regarding Distributions from Real Estate Investment Trusts

In this article, the author considers the US treatment of cross-border real estate investment trust (REIT) distributions given the United States’ influence on the development of the OECD approach, the fact that it is the most important REIT market and that it has the largest treaty network with REIT provisions.

Time dependent behavior of the Asian and the US REITs around the subprime crisis

PurposeThe study uses an AR(1)‐EGARCH(1,1) model to investigate the pricing behaviors of the real estate investment trusts (REITs) for four countries (Australia, Japan, Taiwan and the USA) before and after the 2007 financial crisis.Design/methodology/approachThe study uses an AR(1)‐EGARCH(1,1) model to investigate the pricing behaviors of the REITs.FindingsThe results show that after the financial crisis, REITS returns show a stronger linkage to the overall market returns but they are not sensitive to expected interest rate movements, except for the Taiwanese REIT market, which shows a negative and significant reaction to the interest rates. There are stronger asymmetric effects of good and bad news on REIT returns particularly after the post financial crisis for the four REIT markets.Research limitations/implicationsAn examination of the relationship between REIT and the stock market provides information as how REIT provides an effective device related to the stock portfolio diversification.Practical implicationsIt would be interesting to see how the Asian REIT markets differ from the US market on return and risk behavior.Originality/valueThe 2007 subprime crisis happened because of the decline of the real estate market prices in the USA. It represents a special opportunity to examine the time‐dependent behavior of REIT returns in a turbulent market environment.

Hedging effectiveness of REIT futures

PurposeThe hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent years, however few studies have been placed on this area. This study aims to fill in this gap and examine the hedging effectiveness of Australian and Japanese REIT futures over 2002‐2010.Design/methodology/approachThe analysis of this study involves two stages. The first stage is to estimate optimal hedge ratios. A variety of hedging methods is employed, including a traditional hedge, an ordinary least squares (OLS) model and a bivariate GARCH model. Thereafter, the hedging effectiveness of these strategies is assessed individually.FindingsThe empirical results show REIT futures are effective hedging instruments in which a risk reduction of 37 per cent‐78 per cent (34 per cent‐52 per cent) for Australian (Japanese) REITs is evident. Importantly, the results also reveal that REIT futures outperform other hedging instruments in which a weaker risk reduction is found by stock, interest rate and foreign currency futures contracts. Moreover, the hedging effectiveness of REIT futures is dynamic and varies over time.Practical implicationsThe findings enable more informed and practical investment decision‐making regarding the role of REIT futures in risk management.Originality/valueThis paper, as far as the authors are aware, is the first study to offer empirical evidence of the risk‐reduction effectiveness of REIT futures. The hedging effectiveness of REIT futures is also compared to other hedging instruments for the first time.

REIT performance and market timing ability

PurposeThe purpose of this paper is to study performance and market timing ability of equity real estate investment trusts (REITs).Design/methodology/approachThe authors use classical regression‐based framework and their multi‐index, multifactor, and conditional extensions to jointly detect asset selectivity and market timing ability of equity REITs and their subcategories. These results are then validated by a nonparametric test.FindingsIt is found that equity REITs in aggregate have some housing market timing ability. Various equity REIT subcategories perform differently: office REITs can discover underpriced properties, while retail, industrial, and office REITs have poor timing ability. Nonparametric tests confirm that equity REITs do not have ability to predict real estate market movements.Originality/valueResearch in REIT performance evaluation is still limited to the asset selectivity aspect. This paper intends to fill this gap by providing empirical evidence of market timing ability of equity REITs using an array of parametric and nonparametric methods.

Long-run inflation-hedging properties of United State equity real estate investment trusts (REITs): Before and after the structural break in the 1990s

This study is the first to demonstrate a change in the long-run, in inflation-hedging properties of United State real estate investment trusts (REITs) before and after the early 1990s. In particular, REITs served as a hedge for expected inflation after the structural break, but not before. In addition, the changes appear to be driven by large-cap REITs. These findings are consistent with the view that increased institutional involvement in the REIT market after the break improved information flow and helped REIT prices to more accurately reflect the performance of underlying real estate (Ziering et al., 1997). Key words: REIT, Inflation, equity, structural break.

The structure of REIT-beta

Recent studies have documented an asymmetry in the market-beta of equity Real Estate Investment Trusts (REITs) based on high and low Gross Domestic Product (GDP) growth states, as well as in bull and bear stock markets. The asymmetry has been deemed a puzzle (Chatrath et al., 2000; Chiang et al., 2004); some previous studies explained it by describing the structural changes in REITs market and others included more variables to reduce the effect of asymmetry. What seems to be lacking, however, is a general theoretical explanation. This article provides a theoretical model in which the daily and monthly price series of REITs are separately described to explain the structure of REIT-beta and to solve this puzzle. We find there are four factors and the interaction of those determining the value of estimated beta. The results of previous studies might only be able to observe a few pieces of the nature of REIT-beta.

The convergent behavior in REIT markets

PurposeThe purpose of this paper is to analyze whether a convergent behavior exists in the price indexes of the seven Asian Real Estate Investment Trust (REIT) markets.Design/methodology/approachThe authors investigate the convergent behavior in Asian REIT indexes against Japan and the USA by conducting the unit‐root testing procedure.FindingsResults show that the Asian REIT markets are more connected with the US REIT market than with that of Japan. The convergent behavior was more obvious since 2007.Practical implicationsThe underlying assets of real estate securities in different countries are usually not directly related; hence, there should be segmentation to a certain extent between international REIT markets as well. If the performances of Asian REIT markets are converged, this linkage can be viewed as a contagion effect.Originality/valueThe results of this paper indicate that the risk of REITs might be underestimated and the benefit that investors may acquire from adding REITs to their portfolios might be overestimated.