Real Estate Investment Trusts Research Articles

CEO–CFO team optimism: Commercial real estate transactions and REIT performance

AbstractThe managerial optimism literature concentrates on CEOs neglecting other executive team members. We evaluate the interplay of the optimism levels of the CEOs and CFOs of real estate investment trusts, and study their commercial real estate transactions. We find that firms led by optimistic CEO/CFO teams pay 3% more than their peers for their asset acquisitions if cash ratio increases by one percentage point. Our findings also exhibit inferior stock performance by optimistic teams following a transaction. Conversely, diversity in terms of CEO/CFO optimism prevents firms from overpaying, serving as a soft governance mechanism with salience to firm performance.

Liquidity in the Mortgage Market: How does the COVID-19 Crisis Compare with the Global Financial Crisis?

The liquidity strains that contributed to the meltdown of the mortgage market in the Global Financial Crisis (GFC) re-emerged in the Coronavirus 2019 (COVID-19) Crisis. Some of these strains were acute. For example, the dependence of mortgage real estate investment trusts (REITs) on short-term funding amplified market disruption in March 2020. However, other liquidity pressures had only minor repercussions for the overall mortgage market because of reforms since the GFC, a heavy government presence, and strong house prices. The lackluster performance of the private-label mortgage-backed securities market provides a glimpse of how the market might have performed in the absence of the heavy government presence.

Liquidity in the mortgage market: How does the COVID‐19 crisis compare with the global financial crisis?

The liquidity strains that contributed to the meltdown of the mortgage market in the Global Financial Crisis (GFC) re‐emerged in the Coronavirus 2019 (COVID‐19) Crisis. Some of these strains were acute. For example, the dependence of mortgage real estate investment trusts (REITs) on short‐term funding amplified market disruption in March 2020. However, other liquidity pressures had only minor repercussions for the overall mortgage market because of reforms since the GFC, a heavy government presence, and strong house prices. The lackluster performance of the private‐label mortgage‐backed securities market provides a glimpse of how the market might have performed in the absence of the heavy government presence.

PASS-THROUGH BUSINESS ENTITY CHOICE AND EARNINGS MANAGEMENT: EVIDENCE FROM UK REAL ESTATE INVESTMENT TRUST CONVERSION

This empirical study innovatively investigates how the choice of a pass-through business entity and corresponding regulatory regime influence firms’ earnings management (EM) behaviors by testing on the UK Real Estate Investment Trust (REIT) conversion. A substantial proportion of UK non-REIT publicly traded property companies (LPCs) have chosen to become REITs since the UK REITs were launched in 2007. We conduct a series of tests on a database containing UK LPCs and REITs from 2000 to 2019 and find that conversion into pass-through business entity regimes like REITs that enjoy more favorable tax treatment but face more restrictions leads to more accrual earnings management (AEM) activity, but less real earnings management (REM) activity.

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.

Pandemic Proof Property Companies

Using a sample of 163 U.S. based equity real estate investment trusts (REITs), this paper explores the consequences of COVID-19 on securitized commercial property markets. More specifically, we first map the geographic location of each firm’s investment property holdings to gauge the degree of exposure of each REIT’s asset base to the pandemic. We next demonstrate these firm level exposure metrics are directly related to the negative returns encountered by REITs in the early months of the pandemic and explore what firm specific characteristics and attributes (notably financial flexibility and financing constraints) may moderate this relation and enhance the resiliency of their equity returns. Finally, we examine the impact of the Federal Reserve’s late-March intervention designed to address and soften the economic fallout of the pandemic and ensure the liquidity and stability of capital markets. After this intervention, previously observed relations and patterns between firm specific COVID-exposure levels and operating characteristics fail to retain their prior signs and significance. In sum, the magnitude of the government’s response to the economic challenges brought about by the coronavirus pandemic is shown to outweigh the importance of firm specific factors in predicting the resiliency of REIT returns during this crisis period.

Board structure and financial stability of financial firms: Do board policies and CEO duality matter?

As the financial sector plays a central role in the economic development of the countries, its proper functioning is also important for other sectors. This study tests whether female and independent directors ensure financial stability in the financial firms with the moderating effect of board policies and duality where the Chief Executive Officer (CEO) also chairs the board of directors. The results reveal that while board gender diversity ensures financial stability in the full sample of financial firms and the sub-samples of Banking, Insurance, and Residential and Commercial Real Estate Investment Trusts (REITs), it does not in Investment Banking and Real Estate firms. Moreover, the findings confirm that board independence improves financial stability only in the Investment Banking sub-sector. It is noteworthy that our main results, but not the robustness tests, find that independent directors actually reduce financial stability in the Banking sub-sector. It should be noted that our findings are sometimes contingent upon the analyzed sub-sector, a country’s legal system and enforcement mechanisms, and whether the primary domicile of a company is in the European Union. Moderation analyses show that depending on the sub-sector, board policies and CEO duality have a very limited role in strengthening the directors’ monitoring function and ensuring financial stability. For five sub-sectors, far-reaching implications considering contingencies are suggested in the conclusion section.

Trends in Real Estate Investment Trust Ownership of US Health Care Properties

This cross-sectional study examines the prevalence and characteristics of real estate investment trust-owned health care properties in the US health care sector.

Short selling and options trading: A tale of two markets

AbstractRecent research documents both short selling and option volume are predictive of future real estate investment trust (REIT) returns, suggesting informed investors exploit their informational advantage in both the traditional equity and derivative security markets. However, little work has explicitly examined the factors influencing which of these markets informed investors choose to engage when transacting. We address this gap in the literature and find clear evidence that the risk associated with short selling is a significant driver of this decision. Specifically, using a sample of 124 unique equity REITS with both active short selling and option markets over the past 10 years, we find that when short selling is riskier, option volume is more predictive of future returns. These results suggest that investors view options as an alternative to shorting, and their decision to transact in the derivatives market is materially influenced by short‐selling risk.

Informational efficiency and GICS classification: Evidence from REITs

The historical promotion of the real estate industry in the Global Industry Classification Standard (GICS) system to a new headline sector should raise the informational efficiency of pricing for the asset class. We test this hypothesis for the first time using a large sample of publicly traded real estate investment trusts (REITs). Using two alternative statistical tests, we find that REIT returns become more random and less predictable following the event, suggesting better informational efficiency of REIT pricing. Furthermore, we find that the higher pricing efficiency is related to higher institutional ownership in the asset class in the same period. These findings should be of interest to academics and practitioners.

Performance Analysis of a Philippine REIT and Its Optimal Allocation in a Mixed-asset Portfolio

Real estate investment trusts (REIT) are new and potentially lucrative investment vehicles in the Philippines with their inherent risks and rewards. Understanding their behavior and characteristics allows investors to maximize their profits and mitigate their risks. This study specifically considers the Ayala REIT (AREIT) and aims to conduct a performance analysis on it. The study used daily closing quotes of AREIT, Philippine Stock Exchange index and sectoral indices, S&P Philippine bond index, and monthly Philippine treasury bill from August 2020–April 2021. By using established methods in the modern portfolio theory (MPT), the risk- adjusted returns of the AREIT were obtained and compared with those of other assets. Other descriptors, such as correlations that indicate diversification potential were also obtained. This research also extends beyond performance and comparative analyses by using the mean-variance framework to determine the efficient frontiers that highlight the opportunity set of portfolios with the best return for a given level of risk. As a final modification in our AREIT description, this study employed the utility theory to incorporate an investor’s risk appetite in determining the optimal allocation of AREIT. The results show that AREIT had high returns and low risk relative to the other assets considered, as well as low to negative correlations with these assets. Moreover, it was observed that optimal AREIT weight increased with risk-aversion. AREIT played a dual role in increasing yields and mitigating risks in the portfolios considered.

REIT Unit Investment Trusts and Fund Manager Skill

This article examines fund manager skill using a sample of real estate investment trust unit investment trusts (REIT UITs). Since REIT UITs are limited to a single industry and since the fund managers do not trade, REIT UITs present an ideal sample to study fund manager stock-selection skill. Using a hand-collected sample of REIT UITs from May 2009 to July 2015, this article finds that REIT UITs do not deliver a statistically significant positive alpha. This is the first article to investigate fund manager stock-selection skill in REIT UITs and contributes to the literature evaluating the effectiveness of active fund management.

Legal Analysis of Real Estate Investment Trust Regulation in India

As has been the case around the world, the real estate sector has played a pivotal role in the overall growth process of the Indian economy. Since the privatisation of the Indian economy in 1991, the government of India has introduced a variety of investment instruments to capture the interest of millions of potential investors over the last three decades. One such instrument is the Real Estate Investment Trust (REIT). In order to make the market more accessible to investors interested in REIT investments, the Draft Regulations were introduced in 2007. Following numerous modifications, the REIT regulations were finally ratified in 2014 by the Securities and Exchange Board of India. The Indian REIT regulations are aimed at providing an organized market of retail investors in aprofessionally managed ecosystem. However, since its launch in 2014, the REIT regime in India has failed to attract the expected number of investors. Through this paper, the legal structure of REITs in India is reflected, along with changes experienced up to the 2019 amendment. This study also takes a comparative approach in examining the structural aspects of Indian regulations in comparison to those of other countries, and comes up with some recommendations for the improvement of REIT regulations in India.

The Paradoxical Prices of Options

The synchronized relationship between financial and fundamental prices has been topical for years now. It seems that option pricing theory has not been used to disentangle that relationship between two prices during merger and acquisition (M&A) activities. This paper uses Put-Call parity theorem to explore the divergence of financial and fundamental prices in any firm during the acquisition process. The results illustrate that price differentials are persistent; moreover, the differentials are caused by the exponential factor. Despite the fact that some principles are drawn from the real estate investment trust (REIT) literature, the results have wider implications for industries with similar traits to REITs.

Private Funds for Ordinary People: Fees, Flows, and Performance

AbstractWe study private funds available to retail investors of modest wealth. Our sample covers unlisted real estate investment trusts (REITs) for superior cash flow and fee data. Fee structures are skewed toward performance-insensitive components of the compensation contract, particularly front-end loads. The average unlisted REIT underperforms the listed benchmark by 6.5% per year, 5% of which is attributable to fees. Unlisted REITs underperform institutional-grade private equity real estate funds. Fees paid to investment advisors also explain fundraising success, while past performance does not. The underperformance is consistent with the consequences of managerial conflicts of interest, inadequate governance mechanisms, opaque disclosure, and poor investment advice.

Suppose FIRPTA Was Repealed

This article argues, as others have before, that the Foreign Investment in Real Property Tax Act of 1980 (or “FIRPTA”), or at least the provisions of FIRPTA relating to “United States real property holding corporations,” should be repealed. Their enactment in 1980 was misguided and in any event changes in the Internal Revenue Code since then have made the provisions obsolete. But if FIRPTA is repealed, in whole or in part, the article argues that the lack of parity between foreign investment in real property that is made directly or through a partnership, on the one hand, and foreign investment in a real estate investment trust (or a regulated investment company that invests in shares of real estate investment trusts) should be dealt with. Otherwise, repeal will exacerbate existing distortions (which were already pushed further by FIRPTA) resulting from the choice of the entity used to make an investment in US real property. The article also suggests that repeal of FIRPTA would provide an opportunity to look at the taxation of foreign investment in the United States more broadly and in particular the rules that tax income from U.S. real property. The tax treatment of inward investment is a generally neglected subject.The article concludes by arguing against legislation that would keepthe FIRPTA rules and simply expand provisions of present law that favor foreign investment through real estate investment trusts, such as the Real Estate Jobs and Investment Act of 2011.

Economic Policy Uncertainty and Real Estate Market: Evidence from U.S. REITs

We examine how economic policy uncertainty (EPU) affects the monthly performance of U.S. real estate investment trusts (REITs) from 1985 to 2018. First, a positive shock in EPU impairs contemporaneous REIT returns but predicts higher positive future returns. Such a return reversion has not been previously documented, and we provide some explanations. Second, although EPU can explain for the current returns of both equity and mortgage REITs, EPU is unable to predict the future returns of mortgage REITs. Third, breaking down the main EPU index into its four components, we find that the impact of EPU is primarily from the broad newspaper coverage of policy-related economic uncertainties while the other components are less influential. Our results indicate that policy uncertainty can affect the value of real estate assets, and EPU is an economically important factor for understanding and pricing REITs.

Diversification With REITS: A 10 Year Perspective

The application of Real Estate Investment Trusts (REITs) to stock portfolios as a useful diversification tool has grown in popularity for over two decades. In this study, we examine the risk/return tradeoffs over the 10-year period (2010-2019) under multiple diversification strategies. We compare various portfolios including REITs in combination with International Stocks (IS), Emerging Market Stocks (EMS), Small Cap Stocks (SCS), the S&P500 (S&P), the S&P Growth, the S&P Value, the Russell 3000, the Russell 1000 Growth, and the Russel 1000 Value. The results indicate the S&P Growth and the Russell 1000 Growth combined with REITs suggests the best overall risk reduction inferring correlation is domestic focused. Good results are also found for multi-index blends with the Russell 3000 and the S&P 500.

Property market liquidity and REIT liquidity

AbstractThis study examines the asset–stock liquidity relationship for firms with location‐specific assets. Using a sample of real estate investment trusts (REITs), we extend the concept of asset liquidity to include information based on local property market turnover. Our findings confirm that holding more cash increases REIT stock liquidity. More importantly, we find a positive relation between property market liquidity and REIT stock liquidity. This relation is stronger for REITs with lower growth opportunities, less information advantage, and greater financial constraints. Our findings also provide evidence that managers can actively influence stock liquidity through asset structure.

Relationship between Real Estate Investment Trusts (REITs) and financial performance of selected investment banks in Nairobi County, Kenya.

Purpose: To investigate the relationship between real estate mutual funds investment and financial performance of selected investment banks in Nairobi County, Kenya.
 Methodology: The study used descriptive research design. The target population was 22 investment banks in Nairobi Kenya whose respondents were 75 investment managers, 297 investment officers, 124 risk officers, and 161 quality assurance officers. Simple random sampling method was used to obtain a sample of 7 investment banks whose 22 investment managers, 89 investment officers, 38 risk officers, 48 quality assurance officers were included. This study used a questionnaire and secondary data collection form to gather data. This study conducted a pre-test at two randomly selected commercial banks branch in Meru County. These banks were housing finance bank and Kenya Commercial Bank. Inferential analysis generated included model summary to test the level of influence, analysis of variance to test hypothesis and regression coefficients to test the study’s model.
 Results: The respondents agreed that there are reliable customer service services that boost client-bank relations which increases the confidence in investing even higher amounts of income towards REITs. (Mean-3.23). Despite that, respondents disagreed that investor’s wealth is able to grow especially due to profitable returns they generate as a result of engaging in real estate investment trusts (mean-2.23). In addition, the respondents disagreed that banks promote cultural and religion inclusivity by including products such as Islamic real estate investment trusts to incorporate Islams (mean-2.45). The model summary indicated that real estate investment trusts had an R-0.589 and an R-square of 0.347. This indicated that real estate investment trusts influenced 35% of financial performance. Durbin Watson’s value of 1.980 indicated a positive auto-correlation. The ANOVA analysis indicated that real estate investment trusts had an F-statistic of 7.033 and significance level of 0.009 which was below 0.05. There was a relationship between REITs and financial performance. The bank’s rate of return was low due to high price volatility. Investor’ high demand as compared to the supply of REITs by real estate sector played a significant effect on its prices. In addition, the study found out most real estate companies had not set out much REITs which made it tricky for investors to reap maximum returns on them.
 
 Unique contribution to theory, policy and practice: Gaps were established on how real estate investment banks would incorporate diversity in their products. For example, the presence of Islamic real estate investment trusts was found to be missing in investment banks due to complicated Sharia laws on how interest should be accrued so that no party loses in the deal (both the banks and the investor). Investment banks management should develop various REITs products which incorporates diversity such as introducing Islamic products. Investment banks should develop partnership opportunities for real estate companies so that they are able to increase their investment products baskets. CMA should extend a hand to investment banks and firms so that they get appropriate prices on various REITs.