An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market
- 855 Downloads
Institutional investors such as pension funds or insurance companies commonly invest in the unsecuritized and securitized real estate market. We investigate how institutional investor sentiment in the commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theories - flight to liquidity and style investing theory - to explain the sentiment-induced trading behavior of institutional investors in the REIT market for the pre-crisis (2002–2006), crisis (2007–2009) and post-crisis (2010–2012) period. We find that the applicability of either theory depends on economic conditions. In the pre-crisis period institutional investors switched capital in and out of REITs based on their sentiment in the private market (style investing). However, in the crisis period institutional investors switched capital from the illiquid private market to the more liquid REIT market (flight to liquidity). The flight to more liquid REITs continued into the post-crisis to a lesser extent and suggests that the financial crisis has changed institutional investment behavior. Our findings hold across different groups of REITs (e.g. high and low institutional ownership, S&P and non-S&P REITs) and property types. We also find that institutional real estate investor sentiment introduces a non-fundamental component into REIT pricing.
KeywordsInstitutional investor sentiment Flight to liquidity Style investing Asset pricing Real estate
The authors would like to thank Seow Eng Ong, David Geltner, Piet Eichholtz, Andy Naranjo, David Downs, the participants of the 2013 Maastricht University-National University of Singapore-MIT (MNM) symposium and 2013 National AREUEA conference for their valuable comments. We also thank the Real Estate Research Corporation (RERC) for providing us with their data.
- Barkham, R. J., & Ward, C. W. R. (1999). Investor sentiment and noise traders: discount to Net asset value in listed property companies in the U.K. Journal of Real Estate Research, 18(2), 291–312.Google Scholar
- Clayton, J., & MacKinnon, G. (2003a). Departures from NAV in REIT Pricing: The Private Real Estate Cycle, the Value of Liquidity and Investor Sentiment, RERI Working Paper, No. 106Google Scholar
- Giliberto, S. M. (1990). Equity real estate investment trusts and real estate returns. Journal of Real Estate Research, 5(2), 259–263.Google Scholar
- Glushkov, D., Moussawi, R., & Palacios, L. (2009). Institutional Ownership, Concentration, and Breadth Ratios Using Thomson Reuters 13F Data. WRDS Paper Google Scholar
- Graff, R. A., & Young, M. S. (1997). Serial persistence in equity REIT returns. Journal of Real Estate Research, 14(3), 183–214.Google Scholar
- Knotek, E. (2007). How useful is Okun’s Law? federal reserve bank of Kansas city. Economic Review, 73–103.Google Scholar
- Ling, D. C., Naranjo, A., & Scheick, B. (2013). Investor Sentiment, Limits to Arbitrage, and Private Market Returns. Real Estate Economics, in press.Google Scholar
- Myer, F. C. N., & Webb, J. R. (1993). Return properties of equity REITs, common stocks and commercial real estate: a comparison. Journal of Real Estate Research, 8(1), 87–106.Google Scholar
- Neal, R., & Wheatley, S. M. (1998). Do Measures of Investor Sentiment Predict Returns?. Journal of Financial And Quantitative Analysis, 33 (4), 523:547.Google Scholar
- Vayanos, D. (2004). Flight to Quality, Flight to Liquidity, And the Pricing of Risk. NBER working paper 10327.Google Scholar