REIT IPOs Research Articles

Pricing of IPOs under legally-mandated concentrated ownership and commitment period: Evidence from a natural experiment for REITs in Turkey

Signaling and commitment features, as embedded into the legal requirements for REIT IPOs, and a regime change in macroeconomic conditions, going from decades-long uncertainty to recent and unexpected stability, offer new insights into the pricing of REIT IPOs in Turkey. All REIT IPOs between 1996 and 2014 enter our sample. Increases beyond the legally mandated ownership percentage signal asset quality and lessen underpricing. This result differs from those for the non-REIT firms in Turkey and REITs elsewhere. Further, the regime change from macroeconomic uncertainty to stability generates a reversal from substantial underpricing to negligible underpricing/fair pricing.

Rationale behind IPO Underpricing: Evidence from Asian REIT IPOs

AbstractThis article examines the rationale behind IPO underpricing using a sample of REIT IPOs in Asia. Although the IPOs registered an average initial return of 3.08%, the issuers were able to sell the IPO shares above their fundamental values by timing the listings in periods when existing REIT stocks are traded at a premium to their net asset values (NAV). An IPO could therefore be underpriced and yet produce a net gain for the issuer. The issuers’ net gain from IPO is, however, negatively related to long‐run performance of REIT IPOs.

Spillovers of Non-Fundamental Risks in Securitized Real Estate Companies

Ambrose et al (2007) showed that when few REITs were included into the S&P general market indices in 2001, other REITs that are not included in the indices became more correlated with the market index returns. Whilst Ambrose et al (2007) examine information spillovers between two assets in the same category (indexed REITs versus non-indexed REITs), this study tests the information spillover effects of the REIT’s index inclusion on a non-overlapping category of assets represented by non-index real estate operating companies (REOCs). Using both the US and Singapore data, we found that the non-index REOC returns became more correlated with the general market index returns after the REIT’s index inclusion event in the US, but the spillover effects on REOCS were weaker in Singapore market. We also use the REIT IPO events in Singapore to test if spillovers could be induced by other market risks, and our results remain the same, where increases in beta were only observed in REIT market, but the changes were insignificant in REOC betas after the IPO events. However, we also found significant captive relationships between REOCs and their sponsored REITs, which imply that REOCs could use REIT IPOs as a “de-risk” vehicle to reduce systematic risks of the sponsor REOCs.

Differences in underpricing of A-REIT IPOs and Australian property company IPOs

Purpose– A variety of papers have analyzed the underpricing of REIT IPOs or property company IPOs. The purpose of this paper is to compare the two sectors and examines differences in the underpricing of the two types of IPOs.Design/methodology/approach– An OLS regression is used to identify factors influencing the underpricing of A-REIT and property company IPOs from 1994 until 2014.Findings– This study finds that A-REIT IPOs have a significantly lower underpricing on average than Australian property company IPOs. The time taken to list appears to influence the underpricing of both A-REIT IPOs and property company IPOs, in that issues that are filled more quickly have higher underpricing but with the magnitude of the impact being less for A-REITs. The sentiment toward the stock market also appears to impact on the underpricing of A-REIT and property company IPOs again with the magnitude of the impact being less for A-REITs.Practical implications– The paper provides information to new A-REIT and property company issuers, underwriters and investors.Originality/value– The study is the first to compare and examine the differences in the underpricing of both REITs and property companies in the one country over the same time period.

IPO market timing: evidence from the operating performance of REITs

PurposeThe purpose of this paper is to consider the operating performance of real estate investment trust initial public offerings (REIT IPOs) as a measure to find additional evidence of market timing in this sector.Design/methodology/approachA sample of REIT IPOs is analyzed to determine the relationship between IPO clustering and several measures of REIT operating performance.FindingsThe results suggest that timing the market by marginal firms in the REIT sector would be difficult, due to the transparent nature of REITs, leading to lower level of informational asymmetry between REIT managers and investors. Consistent with results found for non‐REIT firms in industry clusters, no evidence was found of a significant difference between the operating performance of REITs which are part of an IPO cluster and those that went public outside of the identified cluster periods.Practical implicationsThis study shows that REIT market is efficient and would not allow REIT managers to time the market.Originality/valueUsing stringent measures of identifying REIT IPO clusters and operating performance as a measure to gauge market timing, this study differs from previous studies and provides additional and robust evidence of transparent nature of REITs that leads to reduced information asymmetry between managers and investors. This result supports the theory that REITs are more transparent and thus less likely to be over‐invested during IPO cluster periods.

Sponsor Backing in Asian REIT IPOs

This paper tests the significance of sponsors in REIT IPOs viz-a-viz quality certification, signal of firm value, and commitment to alleviate moral hazard concerns. We model the REIT pricing and sponsor share retention decisions within a simultaneous decision framework as motivated by Grinblatt and Hwang (Journal of Finance 44:393–420, 1989). We find positive and significant bidirectional relationship between the fraction of shares held by the sponsor in IPO and underpricing which is consistent with Grinblatt and Hwang’s (Journal of Finance 44:393–420, 1989) signaling model. Our results also support the commitment hypothesis that developers that spin off REITs tend to hold more shares at IPO, possibly to compensate investors for the potential moral hazard problems in the aftermarket.

The underpricing of US REIT IPOs: 1996–2010

This study examines the underpricing cost of 123 US REIT IPOs over the period 1996 until June 2010, including the period of the global financial crisis. The study uses OLS multivariate regression to determine some potential factors behind underpricing. The underpricing cost of raising REIT external equity averaged 3.18% using an equal weighting for each of the 123 REIT IPOs. The study finds offer size is positively related to underpricing. A value weighted approach finds that underpricing averages 4.67% and suggests larger offer size is an important determinant for leaving more money on the table. Higher reputation underwriters, the industry differentiated auditor and post offer ownership structure negatively influence underpricing. The study documents declining underpricing over time with the period of 2007–2010 experiencing negative underpricing (overpricing) during the global financial crisis (GFC). Offers during the hot periods of 1997 and 2004 and the office/industrial property type were more highly underpriced. The 10-year treasury interest rate is identified as another significant positive determinant of underpricing.

IPO Pricing Strategies with Deadweight and Search Costs

The model in this paper provides a complementary explanationto the well-known IPO pricing puzzle. The model allows theinvestor to make a decision on whether and when informationshould be gathered, and allows a purchase decision based on theinformation. With this investor's decision-making process inmind, firms price their IPOs to maximize their payoffs by tryingto avoid an IPO failure and by assessing the investor's possiblepost-search outcomes. While the model provides implications tothe general IPO puzzle, the results seem particularly relevant forexplaining the pricing of REIT IPOs, MLP IPOs, and mutualfund IPOs. The model may also help explain why IPOunderpricing levels change over time and suggests thatunderpricing levels might vary across industries.

The Pricing and Underwriting Costs of Japanese REIT IPOs

This study investigates 40 Japanese REIT IPOs during 2001 to 2006 and finds evidence that higher final offer prices are reflected in higher underpricing levels by such IPOs. There is also some evidence that the engagement of one of the big three Japanese underwriting firms suggests less money is left on the table. Economies of scale in underwriting fees for Japanese REIT IPOs are also found. Specifically, the percentage underwriting fees decrease with higher amounts of equity capital sought but the percentage fee decreases at a diminishing rate.

How Much Do REITs Pay for Their IPOs?

Previous studies have documented the reversal in the initial returns of REIT IPOs from overpricing in the 1980s to underpricing in the 1990s. We find that the gross spreads of REIT IPOs decreased significantly in the 1990s. In particular, there is a bimodal clustering for gross spreads at 6.5 and 7.0%. Moreover, in the 1980s around 94% of REIT IPOs had integer offer prices, most of which were priced at either $10 or $20. However, the proportion of integer offer prices decreased to 64% in the 1990s. Higher gross spreads, overpricing, and high frequency of integer offer prices for REIT IPOs in the 1980s are consistent with the marketing hypothesis that in the 1980s REIT IPOs were mainly marketed to less-informed individual investors. Our results explain the dynamic process employed by underwriters in the setting of gross spreads and the pricing of REIT IPOs as a new financial product in response to various structural changes in REITs.

The Role of the Underlying Real Asset Market in REIT IPOs

A leading explanation for IPO cycles is time-varying supply and demand for the underlying assets of the firms that are considering going public. We test this hypothesis using REIT IPOs, taking advantage of the relative transparency of the underlying real asset markets. We document links between REIT IPO activity and both the conditions of the underlying real estate market and the price of REITs. We find no significant relation between the heat of the IPO market and post-IPO operating performance, implying homogeneous firm quality across IPO cycles. Finally, we show that lagged IPO proceeds are related to future increases in investment and in capacity utilization.

How much do REITs Pay for Their IPOs?

Previous studies document the reversal in the initial returns of REIT IPOs from overpricing in the 1980s to underpricing in the 1990s. We find that the gross spreads of REIT IPOs decreased significantly in the 1990s. In particular, there is bimodal clustering at the 6.5% and 7.0% levels. Moreover, in the 1980s approximately 94% of REIT IPOs had integer offer prices, most of which were priced at $10 and $20. However, this proportion decreased to 64% in the 1990s, which indicates the change in REIT pricing uncertainty and negotiation between issuers and underwriters. We attribute the reversal of the gross spreads and initial returns of REIT IPOs to REIT structural changes and the learning process for underwriters in setting the gross spreads and pricing the REIT IPOs as new financial products.

Market Signals Associated with REIT IPOs

Previous studies have found significant but time-varying valuation effects associated with real estate investment trusts initial public offerings (REIT IPOs). Because REIT IPOs may disclose relevant information about real estate market conditions, they may serve to revalue existing real estate securities. To determine whether REIT IPOs signal information that is impounded into the share prices of other real estate securities, we assess the returns on “rival” portfolios of existing real estate securities upon the issuance of the IPO. On average, the “rival” portfolios experience insignificant effects on the REIT IPO filing date, but negative and significant abnormal returns around the issue date. A cross-sectional analysis of combined effects at the time of the filing date and issue date shows that the negative effects on the “rival” portfolios are more pronounced when (1) the size of the REIT IPO is larger, (2) market conditions are relatively weak, (3) more REIT IPOs come to market, and (4) the IPO is not associated with an umbrella partnership REIT.

Canadian Real Estate Investment Trusts: A Review of the IPO Literature and Preliminary Analysis of Canadian REIT IPO Pricing

AbstractInitial Public Offerings (IPOs) of equity securities often exhibit underpricing; common stock values tend to rise significantly from the offer price on the first day of trading. The evidence for Real Estate Investment Trust (REIT) IPOs is less consistent. Early studies found evidence of overpricing; a 1990s study found underpricing. Several theories as to why this underpricing might be a rational strategy for a firm are outlined in the paper along with a discussion of their likely applicability to REITs as an asset class. The author's preliminary study examines the IPOs of the 13 Canadian REITs listed on the TSE in mid‐1998, and shows evidence of underpricing of IPO units over the first 10 and 20 days of trading.RésuméLes actions mobilières introduites en bourse sont souvent sous‐évaluées; le prix des actions ordinaires tend à augmenter d'une façon importante à partir du prix initial durant le premier jour de transactions à la bourse. En ce qui concerne l'introduction en bourse des Trusts d'Investissements Immobiliers (REIT) les preuves sont moins conséquentes, puisque les conclusions des premières études faisaient état des surévaluations; une étude menée dans les années 90 aboutissait, quant à elle, aux sous‐évaluations. Plusieurs théories ont été proposées pour expliquer la raison pour laquelle cette sousévaluation pourrait être une stratégie rationnelle pour une firme. Nous présentons ces théories dans cet article et nous analysons leur application aux REITs en tant que classe de valeurs mobilières. Notre étude préliminaire, qui examine l'introduction en bourse des 13 REITs cana‐diens cotés à la Bourse de Toronto à la mi‐1998, trouve qu'au cours des 10 à 20 premiers jours de transactions. les actions introduites en bourse sont sousévaluées.

IPOs and Mutual Fund Returns

Recent research on mutual fund performance has ignored the impact of initial public offering on mutual fund performance. We show that the real estate mutual funds returns, at least in the 1990's, are almost entirely a function of REIT IPO returns, and that, after controlling for the REIT IPO returns, the real estate mutual funds exhibit no sensitivity to the Fama-French or momentum factors. We find that while REIT IPOs exhibited statistically significant long-run abnormal performance, real estate mutual funds did not.