US Real Estate Investment Trusts Research Articles

Future Development Trends of REITs in Mainland China

REITs, as unconventional real estate financial tools, are considered to be the most advanced productivity representatives in the real estate industry. With the issuance of the “Notice on Promoting the Pilot Work of Real Estate Investment Trusts (REITs) in the Infrastructure Sector”, the establishment of China’s real estate investment trusts (REITs) market has become a frontier issue that academia, real estate and financial industries are most concerned about. This article mainly uses the comparison method to analyze the average return rate, FFO growth rate and dividend rate of US and Singapore REITs from 2019 to September 2020. The study found that: when the COVID-19 pandemic and the overall economic environment is unstable, all REITs have varying degrees of negative impact, especially for hotel REITs and retail REITs, the adverse impact is more serious, and the adverse impact on logistics REITs and digital computer room REITs is small. The results show that US and Singapore REITs can better resist risks by adopting the diversified portfolio theory. Based on the comparison of the performance of US and Singapore REITs, this study suggests the future of China: First, pay more attention to the central and western regions and thirdand fourth-tier cities to achieve geographic diversification; second, pay attention to the bright future of logistics REITs and new infrastructure REITs.

DOES CHANGE IN ECONOMIC POLICY UNCERTAINTY AFFECT REAL ESTATE INVESTMENT TRUSTS (REITs)?

This study aims to find the impact of change in economic policy uncertainty (EPU) on the returns and volatilities of 11 CRSP Ziman value-weighted US real estate investment trusts (REITs) during 1985–2016. The results indicate that the change in EPU has a positive relationship with volatility and a negative one with the REITs returns. Among EPU components, news-based component has the major impact than the others. Change in economic policy uncertainty has a significant impact on the returns of all the indices except hybrid, healthcare and unclassified REITs after controlling for macroeconomic variables. Whereas, the volatility is mainly explained by its own past values and macroeconomic variables.

Monetary policy and bubbles in US REITs

AbstractIn this article, we analyze the effects of monetary policy on the bubbles in the Real Estate Investment Trusts (REITs) sector of the United States. We use a time‐varying vector autoregressive model over the quarterly period of 1972:1 to 2018:1. We find protracted periods, starting from the onset of the recent financial crisis to the end of the sample period, where contractionary monetary policy is associated with increases in the bubble component in the REITs of the US economy. This result, which is robust to alternative REITs indexes, is contrary to the “conventional” view, as well as to the predictions of standard models of bubbles.

Do Taxes Matter to Foreign Real Estate Investors? Evidence from FIRPTA Reform

There is little research on whether foreign real estate investors respond to domestic taxes, which is somewhat ironic given that real estate is such a tax-driven industry. This article investigates the impact of taxes on foreign investment in real estate by exploring the response to 2015 reforms to the Foreign Investment in Real Property Tax Act of 1980, a unique section of the US Internal Revenue Code that imposes real estate income and capital gains withholding taxes on foreign investors. The new law exempts qualified foreign pension funds, with the effect of reducing capital gains withholding taxes by up to 35% depending on investor position and home country tax treaties. The authors find that this reform led to a five to seven percentage point increase in annual investment growth from pension funds in countries that experienced a tax rate decrease, relative to general trends in foreign pension fund investment in US real estate investment trusts. In addition, the results suggest that pension funds in those countries responded almost immediately. TOPICS:Real estate, legal/regulatory/public policy Key Findings • The results in this paper suggest that domestic income taxes can be an important determinant of foreign investment in domestic real estate. • Recent changes to the U.S. taxation of foreign investment in U.S. real estate were associated with increased annual growth in investment in U.S. REITs from foreign pension funds in countries that received a tax rate decrease (relative to general foreign pension fund investment trends). • Additionally, affected foreign pension funds appear to have adjusted their investment immediately after the tax reform went into effect.

Macroeconomic Shocks and Changing Dynamics of the U.S. REITs Sector

Unlike the existing literature, which primarily studies the impact of only monetary policy shocks on real estate investment trusts (REITs), this paper develops a change-point vector autoregressive (VAR) model and then analyzes, for the first time, regime-specific impact of demand, supply, monetary policy, and spread yield shocks, identified using sign-restrictions, on US REITs returns. The model first isolates four major macroeconomic regimes in the US since the 1970s and discloses important changes to the statistical properties of REITs returns and its responses to the identified shocks. A variance decomposition analysis revealed aggregate supply shocks to have dominated in the early part of the sample period, and monetary policy and spread shocks at the end. Our results imply that ignoring other possible shocks in the model is likely to lead to incorrect inferences, and over-reliance on (conventional) monetary policy in correcting for possible bubbles in the REITs sector, which it will fail to rectify, given the importance of other shocks driving the REITs sector.

An Analysis of Gains to US Acquiring REIT Shareholders in Domestic and Cross-Border Mergers before and after the Subprime Mortgage Crisis

This paper examines the abnormal returns of acquiring real estate investment trusts (REITs) around the announcement of acquisitions before and after the subprime mortgage crisis. Based on 182 domestic and cross-border US REIT acquisition announcements from 2005 to 2010, the acquiring trusts experienced a 0.73% abnormal return, on average. When the sample was divided into pre-crisis, crisis, and after-crisis subsamples, the acquiring trusts enjoyed the largest abnormal returns (1.86%) for domestic acquisitions during the crisis period. Before the crisis, when the acquisition was cross-border, the target was private, or the transaction was cash-financed, the acquiring trust experienced larger abnormal returns. During the crisis period, the acquiring trust gained larger abnormal returns when the transaction value was larger. After the crisis period, the acquiring trust achieved less abnormal returns in cross-border mergers. For both pre- and after-crisis periods, the shareholders of the acquirer enjoyed larger abnormal returns when the mergers were cash-financed, regardless of whether the target was public or privately held. Neither the blockholder monitoring nor the signaling hypothesis can explain such value gains. The structural changes in the acquirer’s abnormal returns are possibly due to the increased risk aversion of the market participants following the crisis.

International Real Estate Review

Real estate investment trusts (REITs) frequently collect new financial resources by issuing new shares and bonds or requesting for new loans to finance their investment policy. Due to the low transparency of the market, the success and the cost of financing are significantly affected by the reputation and the guarantee offered by the syndicated consortium. International evidence suggests that the decision to change syndicated banks could impact the success of raising new capital for industrial and financial firms, but there is no concrete evidence which suggests that this is the case in the real estate industry. The paper considers a representative sample of US REITs to examine the frequency of switching decisions in the industry and their relationship with leverage policy. The empirical analysis demonstrates a greater likelihood of creating a new financing consortium when a REIT is poorly performing and the average interest rate is increasing. Moreover, the switching strategy is more frequently adopted when the REIT is planning to increase leverage and the current level of leverage is still far from the target value. Results obtained are robust with respect to the new consortium definition and the initial public offering (IPO) effect.

Asymmetry herding behavior of real estate investment trusts: evidence from information demand

This paper investigates the effect of investor demand on herding behavior in the US real estate investment trusts (REITs) market by measuring investors’ information demand using Google’s search volume index. The results show that investors are able to collect information via the internet before deciding how much to invest in the REITs market. Investors who increase their information demand with regard to the REITs market could improve their level of rational investment, thus highlighting rational interpretations. Using quantile regression, we also verify the asymmetry of herding behavior in different market conditions. Spurious herding behavior is detected in a rising market, while investors are likely to follow market trends in times of extreme severe volatility after a systematic recession.

From lowly caterpillar to elegant butterfly : The story of the recent emergence of US selfstorage as an institutional-grade asset class

No property sector has undergone a transformation quite as remarkable as US self-storage — truly a story of lowly caterpillar to elegant butterfly. This paper looks at 60 years of changing US lifestyles to find out what has driven America’s self-storage sector out of the industrial park and onto ‘Main Street USA’. Current statistics show rising values and falling cap rates, with self-storage portfolios becoming a prime target for US real estate investment trusts (REITs). Finally, the paper considers whether this is a trend likely to be repeated elsewhere in the developed world.

The adjustment speeds of short-run real estate investment trust (REIT) and corresponding stock returns in the USA and Australia

This study first uses the non-linear co-integration with structural breaks by Gregory and Hansen (1996) to examine whether non-linear co-integration exists between real estate investment trusts (REITs) and corresponding stock markets in the United States and Australia. Second, we employ the smooth transition vector-error correction model (STVECM) including the generalized autoregressive conditional heteroskedasticity (GARCH) model to separately explore the adjustment efficiencies of non-linear short-run REIT and corresponding stock return dynamics, as well as respective REIT return dynamics when the long-run disequilibrium occurs. The results show that a structural break co-integration exists between the equity and mortgage REITs and stock markets in the US, between the REITs and stock markets in the Australia and between the REIT markets in both the US and Australia. When there are large positive and negative deviations of STVECM, the adjustment speed of reverting to equilibrium of the S&P 500 index is greater than that of the Mortgage REIT index. However, when there are large positive (negative) deviations of STVECM, the adjustment speed of reverting to equilibrium of the Australian REIT (stock) index is greater, and that of the Australian REIT (US REIT) index is greater. In addition, by using a non-linear Granger causality test by Hiemstra and Jones (1994), we find that credit price effects exist between the US for each type of REIT and stock markets regardless of large positive or negative deviations (or returns) in STVECM (or STVAR). However, there is a feedback effect exists between the REITs and the stock markets in Australia.

Why Do Overconfident REIT CEOs Issue More Debt? Mechanisms and Value Implications

This paper examines why overconfident CEOs issue more debt than equity within US Real Estate Investment Trusts (REITs) and the value implications of this debt preference. Consistent with a demand‐side story, the paper finds that overconfident CEOs choose to issue more debt than equity than their non‐overconfident counterparts. The findings also rule out the supply‐side story that overconfident CEOs are screened out of the equity market. CEO preference for debt is associated with a decline in shareholder wealth. Specifically, using an event study, the paper finds that overconfident CEOs suffer an approximately $67 million loss associated with debt issues in market capitalization. Further analysis suggests that the loss stems from the higher default risk induced by overconfident REIT CEOs’ debt preference. The demand‐side explanation remains robust even after considering several CEO demographics, estimation methods, and the following five possible alternative drivers of the main results: (1) insider information; (2) risk tolerance; (3) past performance; (4) dividends; and (5) board pressure.

Unexpected Inflation, Capital Structure, and Real Risk‐adjusted Firm Performance

Managers can improve real risk‐adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk‐adjusted returns to unexpected inflation. The net asset value of US equity real estate investment trusts (REITs) serves as a good proxy for nominal assets and, accordingly, we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real risk‐adjusted performance, and (ii) their inflation‐hedging qualities are inversely related to deviations from this ‘matching‐nominals’ argument. In addition to providing managers with a vehicle to maximize real risk‐adjusted performance, our findings also provide investors with the tools to infer inflation‐hedging qualities of equity investments.

Another piece of the puzzle: REIT IPO underpricing after the financial crisis

PurposeThe purpose of this paper is to investigate the underpricing of real estate investment trust (REIT) initial public offerings (IPOs) from January 2010 to June 2015, as the sector recovered from the global financial crisis.Design/methodology/approachThis study analyses the first day returns of US REIT IPOs in the post financial crisis period. The study then employs regression analysis to examine the factors that influence IPO underpricing.FindingsThe study observes that underpricing, on average, is not significantly different to zero. Furthermore, the REIT IPOs examined display underperformance in the longer term. In contrast to the earlier data samples of Chen and Lu (2006), the authors do not find that underwriting costs are a direct substitute for the indirect cost of underpricing, instead the authors find that higher underwriting costs are associated with higher underpricing. Also in contrast to the mainstream underpricing literature, the data suggest larger capital raisings require higher underpricing. The authors also find that newly listed REITs provided significant excess dividend returns over the post-listing period.Practical implicationsFor institutional and retail investors, the results will help to further inform investment opportunities in REIT IPOs.Originality/valueThis paper adds to the ongoing academic debate of the lack of underpricing in REIT IPOs relative to industrial companies. Research has shown periods of underpricing are often replaced with periods of overpricing suggesting that the pattern of behavior in REIT markets is substantially different.

REITs and the Taper Tantrum

Purpose – The purpose of this paper is to empirically examine the effect on US stock, bond and real estate investment trust (REIT) prices triggered by the US Federal Reserve Chairman Ben Bernanke’s announcement of a possible intent to unwind, or taper, quantitative easing (QE). In particular, the author assessed whether the effect of the “Taper Tantrum” was fundamental or financial on financial markets. Design/methodology/approach – The methodology used to determine whether the effect of the “Taper Tantrum” was fundamental or purely financial is that suggested by French and Roll (1986) as extended by Tuluca et al. (2003). The analysis is based on daily data for large cap stocks, small cap stocks, long-term bonds and REITs for 18 months before Ben Bernanke’s announcement and for 18 months after the announcement. Findings – The results show that the “Taper Tantrum” had a fundamental, rather than a financial effect on all asset classes, especially so for REITs. Practical implications – The author also found that in the post-taper period following Ben Bernanke’s announcement the correlation of REITs with stocks decreased compared with pre-taper period, whereas the correlation of REITS with bonds increased substantially. In other words, the “Taper Tantrum” had a profound effect on the risk/return benefits of including REITs in the US mixed-asset portfolio. Originality/value – This is the first paper to examine the effect of the “Taper Tantrum” on REITs.

Real estate returns predictability revisited: novel evidence from the US REITs market

In this paper, we examine the real estate returns predictability employing US real estate investment trusts (REITs) and a set of possible predictors for the period January 1991–December 2014. To this end, we employ several forecasting models to test for REITs predictability under a flexible framework that captures parameter instability. Apart from the traditional factors examined in relevant studies, we also account for a series of sentiment and uncertainty indicators that may be significant predictors of REITs returns, especially during turbulent times when sentiment determines investment decisions to a greater extent. The empirical results indicate that the good predictors of REITs returns vary over time and over the forecast horizons. Our results suggest that economy-wide indicators, monetary policy instruments and sentiment indicators are among the most powerful predictors of REITs returns. In economic terms, an investment strategy that is based on our forecasts outperforms a buy and hold strategy. The issue of the most suitable forecasting method is also discussed in detail. Our results might entail implications for investors and market authorities.

Reference-Dependent Analysis of Capital Structure and REIT Performance

Using prospect theory, we develop a theoretical framework to examine the relationship between leverage and Real Estate Investment Trust (REIT) returns by introducing the concept of reference point. We postulate that firms’ capital structure decisions are affected by a target leverage ratio (i.e., the reference point) as well as the observed leverage ratio. Firm-specific and time-varying target leverage determines a firm’s leverage position, which when combined with market conditions will put firms in either loss or gain domains, where firms behave differently. In general, the effect of leverage on returns is positive in the gain domain and negative in the loss domain. Two hypotheses are derived and tested by using US REITs data from 1993-2013. Our empirical evidence shows strong support for our theoretical model. Compared to the conventional approach where only observed leverage is used, our model is more flexible and realistic in revealing the underlying structure of the leverage-returns relationship. It is also a potential solution to reconcile conflicting findings in the literature.

Development of Empirical Correlations between Wilshire US REIT Index and Dow Jones Industrial Average Index and Different Interest Rate Swaps

REITs (Real Estate Investment Trusts) have gained significant popularity among the financial investors in therecent years. The investors do not have access to any model that correlates Wilshire US REIT Index with DowJones Industrial Average and different interest rate swaps. The researcher has developed empirical correlationsbetween Wilshire US REIT Index and Dow Jones Average and swap rates of different durations. The nullhypothesis that no correlation exists between natural logarithms of Wilshire US REIT Index and naturallogarithms of Dow Jones Industrial Average Index has been tested. The researcher has also tested the nullhypotheses that no correlation exists between natural logarithms of Wilshire US REIT Index and interest rateswaps of different durations. The period used in this study is from March 10, 2005, to March 10, 2015. Thefindings from this study indicate that the null hypothesis that no correlation exists between natural logarithm ofUS REIT Index and Dow Jones Industrial Average Index can be rejected. Further, the null hypotheses that nocorrelation exists between natural logarithms of US REIT Index and 1-year, 2-year, 3-year and 30-year interestrate swaps can also be rejected.

Unexpected Inflation, Capital Structure and Real Risk-Adjusted Firm Performance

Managers can improve real risk-adjusted firm performance by matching nominal assets with nominal liabilities, thereby reducing the sensitivity of real risk-adjusted returns to unexpected inflation. The Net Asset Value (NAV) of US equity Real Estate Investment Trusts (REITs) serves as a good proxy for nominal assets and accordingly we use a sample of US REITs to test our hypothesis. We find that for the firms in our sample: (i) their real, risk-adjusted performance, and (ii) their inflation hedging qualities are inversely related to deviations from this matching-nominals argument. In addition to providing managers with a vehicle to maximise real, risk-adjusted performance, our findings also provide investors with the tools to infer inflation-hedging qualities of equity investments.

Are there periodically collapsing bubbles in the REIT markets? New evidence from the US

This study tests for the presence of Evans’ (1991) periodically collapsing bubbles in four real estate investment trust (REIT) classifications in the US by employing the momentum threshold autoregressive (MTAR) model and the MTAR model with smooth transition in trend (i.e., the LNV-MTAR model). By taking into account asymmetries in departures from the long-run equilibrium relationship, the MTAR technique is designed to empirically capture the characteristics of periodically collapsing bubbles. The results of the linear unit root test show evidence of rational bubbles, but the results of the MTAR test are mixed in the US REIT markets. The results of the LNV-MTAR test show that periodically collapsing bubbles do not hold in the US REIT markets provided that a structural shift in trend is allowed.

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.