Real Estate Investment Trust Market Research Articles

Triple-net leased property portfolios and operational efficiency: Evidence from the U.S. REIT market

Triple-net leases are legal agreements by which tenants, beyond rent payments, are responsible for operating expenses such as real estate taxes, insurance, and maintenance costs. We examine the relative operational efficiency of Real Estate Investment Trusts (REITs) holding property portfolios consisting of majority triple-net leases. Results suggest REIT holding triple-net leased portfolios are more operationally efficient than their counterparts. Our results suggest that selecting proper lease expense provisions specifying who carries the obligation of operating expenses is a determining factor of REIT operational efficiency.

The Effects of Conventional and Unconventional Monetary Policy Shocks on US REITs Moments: Evidence from VARs with Functional Shocks

AbstractWe use a vector autoregressive model with functional shocks, capturing the shift of the entire term structure of interest rates on monetary policy announcement dates, to empirically evaluate the effects of conventional and unconventional monetary policy decisions on the Real Estate Investment Trusts (REITs) markets of the United States (US). Using 5-min interval intraday data, we analyze not only the impact on REITs returns, but also its realized variance (RV), realized jumps (RJ), realized skewness (RSK), and realized kurtosis (RKU) over the daily period of September 2008 to June 2021. While the effects of conventional monetary policy shocks on the moments of REITs returns tend to conform with economic theories, the same is not necessarily the case with unconventional monetary policy shocks. In addition, though monetary policy shocks have the most persistent and strongest effects on RJ, the extreme behaviour of the REITs market is also observed through RSK and RKU. Moreover, when we look into 10 REITs sectors, there is indeed heterogeneity in terms of the strength of the effect, but not so much in terms of the sign of responses of the various moments compared to the overall market. Our results have important implications for REITs market participants, given its exponential growth as an asset class.

The Dynamics of the Impact of the Covid-19 Pandemic on Pan-Asia’s Real Estate Investment Trusts

Abstract This study evaluated the dynamics of Real Estate Investment Trusts (REITs) in Pan-Asian countries impacted by COVID-19. The countries comprised Malaysia, Thailand, Indonesia, Singapore, Vietnam, South Korea, Japan, China, the Philippines, and Hong Kong. The study aimed to understand how the global crisis affected the real estate industry, specifically publicly traded companies. The COVID-19 pandemic significantly impacted many industries worldwide, including real estate. It caused changes in supply and demand dynamics, disrupted business operations and affected economic activity. The pandemic has also caused a general economic slowdown, with businesses struggling and unemployment rates increasing in some countries in Asia. This in turn has led to reduced consumer spending and lower demand for all types of properties, impacting the overall performance of the Asian REITs market. This study employed techniques such as Sharpe ratio, variance ratio, and Analysis of Variance (ANOVA) to highlight the dynamics of Asian REITs towards the impact of COVID-19. The findings revealed that all Asian countries were severely impacted by COVID-19, with Japan REITs experiencing the highest drop and Taiwan REITs experiencing the lowest decline.

Analysis of the Game Behavior of Real Estate Mortgage Securities Issuers Based on Reciprocal Preferences

In recent years, the Chinese government has gradually begun to pay attention to the development of real estate investment trusts (REITs) and hopes to use REITs to increase the securitization of assets in the real estate market, making it possible to accelerate the circulation of funds in the real estate market. In order to enable issuers to price REITs effectively to form a mutually beneficial transaction model with investors, to increase the willingness and success rate of both parties and to ultimately create a harmonious and efficient REITs market, it is important to study the pricing decisions of issuers when issuing REITs. This study analyzes and investigates the issue of pricing decisions of REITs based on reciprocal preferences and evolutionary game theory. It is found that when the proportion of REITs issuers choosing to construct a reciprocal initial pricing decision is greater than the equilibrium probability of REITs issuers choosing a reciprocal pricing strategy, and when the initial proportion of investors choosing a reciprocal investment decision is greater than the equilibrium probability of investors choosing a reciprocal investment strategy, the overall REITs transaction market tends to be a reciprocal and harmonious transaction market at this time, the overall happiness of the REITs trading market is the highest, and the success rate of trading increases and the capital circulation of the real estate market is accelerated. Therefore, it is recommended that issuers choose reciprocal competitive decisions when pricing REITs in order to increase the success rate of their own REIT holdings; and it is recommended that the government, when regulating the pricing of REITs, pays attention to the psychological factors of reciprocal preferences of issuers and investors and that the government penalizes REIT issuers and investors when they choose self-serving decisions and rewards them when they choose reciprocal decisions.

Asymmetric volatility transmission and hedging strategies among REIT, stock, and oil markets

AbstractHow do price fluctuations in the real estate investment trust (REIT) market relate to price fluctuations in other financial markets, such as the stock and commodity markets? In order to grasper this topic, we examine the transmission of shocks and volatility spillover among the REIT, stock, and oil markets using a trivariate asymmetric GARCH model with BEKK specification. The empirical results indicate that there exists shock transmission from REIT to the oil markets and from the stock market to both the oil and REIT markets. The results also show that the volatility of the REIT market is transmitted to both oil and stock markets. Conditional correlations among the volatility of these markets are dynamic and crisis‐sensitive. The correlations are positive between the volatility of stock and both REIT and oil markets. However, equity investors should be more interested in adding REIT assets to equity portfolios than oil futures to minimise risk, without reducing expected returns.

Impacts on REIT Stock Capital Structures, Equity Costs, and Market Liquidities of Being Included in ETF Managed Portfolios

In recent years, especially as compared to mutual funds, exchange traded fund (ETF) markets have grown and advanced significantly compared to other financial asset classes because of relative advantages. We found that inclusion of real estate investment trusts (REITs) in ETF assets under management (AUM) positively impacts REIT capital structure (financial leverage), cost of equity capital, and stock market liquidity. As percentages of REIT outstanding shares included in ETF AUM increased, we found corresponding reductions in financial leverage (both book and market leverage), reduced costs of equity capital, and greater market liquidity. This should be of particular interest to REIT and ETF managers as well as REIT and ETF investors. Partially because regulatory statutes incentivize REITs to rely more heavily on external equity financing, REIT stocks included as ETF AUM showed greater reductions in leverage compared to non-REIT stocks also held as ETF AUM. Our results, including applying difference-in-differences models, were robust with respect to these findings, REIT type, and firm fixed effects.

REIT Long-Term Returns and Wealth Creation

This study examined the performance of 371 equity real estate investment trusts (REITs) over the period 1972–2020. Unlike stocks, we found that the majority of the 371 REITs outperformed one-month T-bills, particularly over longer holding periods and in the modern REIT era. While most REITs outperformed the T-bills, only a minority of them outperformed the overall equity REIT market. REITs that outperformed the overall equity REIT market concentrated in the health care, industrial, residential, and other specialty REIT sectors. In terms of wealth creation, REITs in aggregate created a total net wealth of $0.89 trillion to their shareholders, but the wealth creation was highly concentrated in relatively few top-performing REITs. Specifically, the top five (20) REITs together accounted for almost 30% (60%) of the total net wealth creation. Overall, our results suggest that relative to the T-bills, REITs performed better than stocks.

Predicting the returns of the US real estate investment trust market: evidence from the group method of data handling neural network

PurposeThe Group Method of Data Handling (GMDH) neural network has demonstrated good performance in data mining, prediction, and optimization. Scholars have used it to forecast stock and real estate investment trust (REIT) returns in some countries and region, but not in the United States (US) REIT market. The primary goal of this study is to predict the US REIT market using GMDH and then compare its accuracy with that derived from the traditional prediction method.Design/methodology/approachTo forecast the return on the US REIT index, this study used the GMDH neural network and the generalized autoregressive conditional heteroscedasticity (GARCH) model. In this test, the training samples, testing samples, and kernel functions of the GMDH model are controlled to investigate their impact on the accuracy of the machine learning approach. Corresponding experiments were performed using the GARCH model, and the accuracies of these two approaches were compared.FindingsCompared with GARCH, GMDH’s accuracy is much higher, indicating that the machine learning approach can provide a highly accurate prediction of REIT prices. The size of the training samples and the kernel functions in the GMDH model affect the accuracy of the prediction results. In particular, the kernel function has a significant impact on prediction accuracy. The linear and linear covariance kernel functions are simple to train and yield accurate predictions, whereas the quadratic function is difficult to train. Even with small training samples, GMDH can outperform GARCH in prediction accuracy.Research limitations/implicationsAlthough GMDH shows good performance in predicting the US REIT return, it is still a black-box model, and the algorithm is difficult for financial analysts to develop and customize. The data used in this study come from the US REIT market, which is the world’s largest and most liquid market.Social implicationsThis research shows that the GMDH model outperforms the GARCH model in forecasting REIT returns. Hence, investors can use the machine learning approach to make more accurate predictions of the target REITs’ returns and thus better investment decisions. Future investors and researchers may use GMDH to forecast the performance of REITs in other markets.Originality/valueThis is the first study to apply the GMDH neural network to the US REIT market and determine the impact of the two factors on its performance. For example, this research first discusses the impact of kernel functions on the US REIT market using the GMDH neural network. It also includes short-term daily prediction returns that were not previously considered, making it a valuable reference for financial industry analysts.

Analyses for the effects of investor sentiment on the price adjustment behaviors for stock market and REIT market

This study examines the effects of investor sentiment on the asymmetric price adjustment behaviors for real estate investment trusts (REIT) and the stock prices by applying the threshold error correction (EC) model. The regimes in the threshold EC model are defined by the investor sentiment indicators, such as: the VIX index, the VXO index, the put/call ratio, and two Google search indexes. The empirical results reveal that the asymmetric price adjustment behaviors and the causality effects were different when using the different indicators of investor sentiments to define the regimes. The other main findings are summarized as follows: First, the price adjustment behaviors and lead-lag relationships for both REITs and stock returns indeed exhibits asymmetric effects under different investor sentiments. Second, the coefficients of price adjustment are significantly negative values under most regimes. It implies that these two markets exhibit significant error-correction behavior when short-term market disequilibrium occurs. Third, for most cases, if market participants are strongly bearish or pay higher attention (i.e., in the upper regime), they will quickly adjust their portfolios in response to an economic shock. Fourth, the efficiency of the price adjustment behavior is greater in the REIT market than in the stock market. Finally, for most regimes, there are two-way causalities between the two markets. Our results should help market participants from the perspective of investor sentiment to undertake optimal investment strategies for their portfolios.

Fama–French–Carhart Factor-Based Premiums in the US REIT Market: A Risk Based Explanation, and the Impact of Financial Distress and Liquidity Crisis from 2001 to 2020

The study investigates the impact of financial distress (credit spread) and liquidity crises (TED spread) on size, value, profitability, investment and momentum premiums within the US Real Estate Investment Trust market. Using daily data from 2001 to 2020, we examine the presence, magnitude and significance of these premiums, along with assessing if these premiums are associated with higher risk. The study then employs Auto-regressive distributed lag and Error Correction Modeling to establish the long/short-run impact of financial distress and liquidity crisis on these premiums during recessionary and non-recessionary phases, including COVID-19. Premiums associated with all five factors are positive and significant. Secondly, in contradiction to the Efficient Market Hypothesis, we find that value and momentum portfolios provide superior returns without exposing investors to higher risk while portfolios based on size, profitability and investment, do tend to expose investors to a higher risk. Thirdly, in contradiction to the risk based explanation of Fama–French/Carhart (2015/1997), we find significant evidence of a fall in profitability and momentum premiums with an uptick in financial distress and liquidity crisis. On the other hand, size, value and investment premiums rise with financial distress/liquidity crisis, only during the recessionary phases. This impact is insignificant during non-recessionary phases.

Bankruptcy Risk and the Cross-Section of REITs

This article investigates the equity cross-section of real estate investment trusts (REITs) both when REITs are added as a separate portfolio to the cross-section of industries and when individual REITs are studied in isolation. A nine-factor asset pricing model which critically relies on the bankruptcy risk factor of Neumann (2021b) produces REIT portfolios which outperform the REIT market in terms of Sharpe ratio and the S&P 500 index in terms of absolute returns. The decrease in adjusted R² of an asset pricing model when REITs are included as a separate portfolio is presented as an alternative quantification of the temporally dynamic correlation between REITs and other equity assets.

From an Emerging to a Consolidated European REIT Market. The Case of the Underpricing of Spanish Direct Listing REITs

ABSTRACT This study analyzes the underpricing in a sample of 41 Real Estate Investment Trusts (REIT) that went public in the Spanish market between 2013 and 2019. Results show a significant underpricing on the initial day even though none of the flotations were carried out through an Initial Public Offering but instead through a direct listing. This underpricing is not accounted for by theories on information asymmetry but by certain signaling theories related to capital structure, by investor sentiment and market peculiarities. This research provides additional insights for international investors in one of the largest European REIT markets.

The Time-Varying Link of Public Timber REITs with Private Timberland, Real Estate, and Financial Assets

Abstract We examined the relationship between public timber real estate investment trusts (REIT), private timberland, real estate, and financial asset returns using a multi-factor model and investigated the time-varying volatility of timber REITs under the state space framework. We first orthogonalized explanatory variables to obtain pure factors. Then we decomposed REIT volatility into S&P500, private-equity timberland, real estate, bond, and idiosyncratic risk components. Results reveal that timber REITs are positively sensitive to large-cap stocks and bonds. Volatility contributions of the large-cap stock factor are consistent and high whereas those of idiosyncratic risk factors decline over time. Private-equity timberland, real estate, and bonds exhibit negligible contribution to the volatility of timber REITs. We conclude that timber REIT characteristics change with time and the timber REIT market is not mature. Thus, the results contribute to our understanding of the risk and return features of public-equity timberland investments.

Exploring a Three-Factor Dependence Structure of Conditional Volatilities: Some Quantile Regression Evidence from Real Estate Investment Trusts

We propose a simple three-factor pricing model, consisting of a local stock market index, a global REIT market index, and a global stock market index, to examine the dependence structure of conditional volatilities in the real estate investment trust (REIT) market from 11 countries over the sample period from 1 June 2008 to 30 April 2021. The main quantile regression results reveal that a simultaneous dependence structure exists between each REIT market and local stock, global REIT market, and global stock market. There is a positive and significant dependence between REITs and three factors for every part of the quantiles. Across each quantile, Asia-Pacific REIT markets have a consistently higher average degree of dependence with their local stock markets than with the global stock and global REIT markets, whereas European REIT markets are generally more globally integrated. Furthermore, the lower and upper quantile estimates for over half of the REIT-quantiles for the three market factors are statistically different. Additionally, some REIT markets display asymmetric co-movement with at least one of the three factors as the degree of dependence increases when these markets are booming, but the dependence level declines when the markets are bearish. This evidence of dependence across the three influential factors and REIT markets provides meaningful insights into REIT market growth, international asset pricing, risk management, and dynamic linkages in the global economy.

The Revival of Business Groups’ Risk Sharing: Evidence from Japanese Real Estate Investment Trust Market

AbstractWe examine the business groups’ risk-sharing hypothesis in the Japanese Real Estate Investment Trust (REIT) market in which the unique external management system seems to be reinforcing power relationships among firms affiliated with the modern Japanese business groups, called keiretsu. We find that REITs whose sponsors belong to one of the keiretsu groups (keiretsu REITs) have significantly lower volatility of profitability than REITs whose sponsors do not belong to the keiretsu groups (non-keiretsu REITs). There is no significant difference in profitability between keiretsu REITs and non-keiretsu REITs, controlling for firm and property characteristics. The abnormal portion of the profitability unexplained by firm characteristics is also significantly lower with keiretsu REITs. We also find that the keiretsu affiliation reduces the systematic volatility of affiliated REITs, while such an effect is not observed with the idiosyncratic volatility, suggesting that the risk-sharing effect may be beneficial for the value of REITs. Using the difference-in-differences design with propensity score matching, we find that the negative impact of the Great East Japan Earthquake on the profitability was significantly smaller with keiretsu REITs than with non-keiretsu REITs. Keiretsu REITs were also able to stabilize their capital structure by shifting some short-term debts to long-term debts without increasing the cost of loans under the uncertain situation caused by the Earthquake. Keiretsu REITs were able to borrow money from their affiliated group banks even right after the earthquake, while non-keiretsu REITs seem to have struggled to secure loans from those banks.

Trading and Volatility in Dual Market: Theory and Evidence from Real Estate

This article investigates the informational role of trading volume and the impact of transaction costs on trading volume and the return dynamics in public and private markets, using real estate as an application. The model extends Kyle (1985) in a framework with two markets associated with asymmetric transaction costs across markets and over time. It derives equilibrium and predicts that at the market downtime, investors’ incentive to trade in the public market increases while that in the private market declines based on a return-cost trade-off, which is when transaction cost in the private market accelerates. Trading volume induces return volatility. The marginal effect of trading volume on price increases monotonically with uncertainty in asset values and transaction costs. An assessment using a simulation method and data on public and private real estate markets in the United States from 1996 to 2014 validates the model’s propositions. We offer two explanations for the increased real estate investment trust (REIT) return volatility during the financial crisis: increased trading volume in the REIT market and a larger marginal impact of volume on price during market downtime.

Corporate focus, residential assets, and the performance of French REITs

AbstractThis paper raises the question of the specific impact of the share of residential assets on the performance of real estate investment trusts (REITs). In the literature, many articles questioning the importance of the nature of assets held in general (and residential assets in particular) do not take the level of diversification of REITs into account. We incorporate this factor into our analysis and integrate our measure of the effects of residential assets in a framework controlling for the impact of the diversification of the type of real estate assets held. Based on French data, we question whether REITs holding residential assets perform better than REITs holding little or no residential assets for a given level of diversification. We do not detect any significant diversification effect on the performances of French REITs. We also test the impact of asset diversification on REITs market volatility. We provide some evidence that firms with strongly concentrated balance sheets are more volatile than diversified firms, but this effect is weaker for REITs holding mostly residential rather than other types of assets.

Market Efficiency of US REITs: A Revisit

The findings on the efficient market hypothesis in the US real estate investment trust (REIT) sector are mixed, and applied methodologies may not be adequate. This paper investigates the weak-form efficient market hypothesis for US REIT stocks. The variance ratio test indicates that the REIT and general stock markets are not efficient in the weak-form: the log price series for REIT stocks violates the random walk theory as a model specification. As an alternative, we applied the quantum harmonic oscillator to provide robust evidence. The quantum harmonic oscillator, including the solution for a random walk as a ground state solution, proved to be a better method for testing the efficient market hypothesis. Contrary to variance ratio test, quantum harmonic oscillator provides results that REIT stocks are more efficient than general stocks, and their market efficiency is close to that of bonds. We argue that large market size and substantial institutional ownership of REIT shares have enhanced market efficiency. The findings suggest that arbitrage in the REIT market cannot be achieved simply by analyzing the historical price trend.

On the Dynamics of International Real-Estate-Investment Trust-Propagation Mechanisms: Evidence from Time-Varying Return and Volatility Connectedness Measures.

In this paper, we investigate the time-varying interconnectedness of international Real Estate Investment Trusts (REITs) markets using daily REIT prices in twelve major REIT countries since the Global Financial Crisis. We construct dynamic total, net total and net pairwise return and volatility connectedness measures to better understand systemic risk and the transmission of shocks across REIT markets. Our findings show that that REIT market interdependence is dynamic and increases significantly during times of heightened uncertainty, including the COVID-19 pandemic. We also find that the US REIT market along with major European REITs are generally sources of shocks to Asian-Pacific REIT markets. Furthermore, US REITs appear to dominate European REITs. These findings highlight that portfolio diversification opportunities decline during times of market uncertainty.

Uncertainty due to infectious diseases and forecastability of the realized variance of United States real estate investment trusts: A note

AbstractWe examine the forecasting power of a daily newspaper‐based index of uncertainty associated with infectious diseases (EMVID) for real estate investment trusts (REITs) realized market variance of the United States (US) via the heterogeneous autoregressive realized volatility (HAR‐RV) model. Our results show that the EMVID index improves the forecast accuracy of realized variance of REITs at short‐, medium‐, and long‐run horizons in a statistically significant manner, with the result being robust to the inclusion of additional controls (leverage, realized jumps, skewness, and kurtosis) capturing extreme market movements, and also carries over to 10 sub‐sectors of the US REITs market. Our results have important portfolio implications for investors during the current period of unprecedented levels of uncertainty resulting from the outbreak of COVID‐19.