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Institutional Property-Type Herding in Real Estate Investment Trusts

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Abstract

This study examines whether institutional investors exhibit herding behavior by property type in real estate investment trusts (REITs). Our analysis of changes in institutional portfolio holdings indicates strong evidence of this behavior. We analyze the autocorrelation in aggregate institutional demand, and find that most of it is driven by institutional investors following the trades of others. This herding occurs at the property-type level, and not at the individual firm level. Although momentum trading explains a small amount of this herding, institutional property-type demand is more strongly associated with lagged demand than lagged returns. The results suggest that correlated information signals drive herding in REITs. In addition, we examine the extent to which herding in REIT property types affects price performance in the private real estate market. We find that information transmission resulting from institutional herding in REITs occurs faster in public real estate markets than in private markets.

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Notes

  1. 1 Derwall, Huij, Brounen, and Marquering (2009) suggest that the conventional multi-factor models do not fully explain the cross-section of REIT returns, and find that a REIT momentum factor provides additional explanatory power. Our study is at the property-type level, and our results in Table 6 show that a momentum-based strategy does not yield abnormal returns. As a result, we are comfortable with interpreting the alphas from three-factor models.

  2. 2 Quarterly market, size, and value factors were obtained from Ken French’s web site.

  3. 3 National Council of Real Estate Investment Fiduciaries

  4. 4 These data are obtained at https://www.ncreif.org/tbi-returns.aspx.

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Acknowledgments

We thank Kent Baker, Nicole Choi, Benjamin Scheick, an anonymous referee, as well as seminar participants at the Southern Finance Association 2013 meeting, the Financial Management Association 2014 meeting, and the AREUEA 2016 meeting for their helpful comments and suggestions

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Authors and Affiliations

  1. Department of Finance, Haub School of Business, Saint Joseph’s University, Philadelphia, PA, 19131, USA

    Viktoriya Lantushenko

  2. Department of Finance, LeBow College of Business, Drexel University, Philadelphia, PA, 19104, USA

    Edward Nelling

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  1. Viktoriya Lantushenko
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  2. Edward Nelling
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Correspondence to Edward Nelling.

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Lantushenko, V., Nelling, E. Institutional Property-Type Herding in Real Estate Investment Trusts. J Real Estate Finan Econ 54, 459–481 (2017). https://doi.org/10.1007/s11146-016-9553-4

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