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On the Hybrid Nature of REITs

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Abstract

The consensus that emerges from the current research on the linkage between securitized and direct investment in real estate is that direct (private) real estate returns play a relatively minor role in the real estate investment trust (REIT) return generating process. However, this result may at least partially be due to the coarseness of the measures of direct real estate returns or the relatively short return horizons used in previous studies. This study takes a different and unique perspective. Unlike earlier studies we do not use aggregated, average appraisal based returns on direct real estate investment. Instead, we use the MIT TBI indexes, which are transaction based price indexes, available both on the aggregate and sub-index levels. We find that the relation between REIT and direct real estate returns appears to be stronger at longer horizons. More specifically, using a cointegration framework, we find robust evidence that REITs and the underlying real estate are related and that they share a long run equilibrium. Interestingly, we find that both REITs and direct real estate returns adjust towards this long run relationship. When we examine property type level data we find similar results.

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Notes

  1. These are taken from: National Real Estate Investors, Hey investor! Are REITs stock or real estate? Oct 1, 1995.

  2. Russell Platt (Morgan Stanley Asset Management).

  3. Mark Brumbaugh (Coopers & Lybrand).

  4. Richard Schoninger (Prudential Securities).

  5. See, i.a., Giliberto (1990), Seck (1996), Zeiring et al. (1997), Clayton and MacKinnon (2003) and Ling and Naranjo (2003).

  6. However, Ackert and Smith (1993) show that including share repurchase and other distributions leads to a failure to reject the dividend pricing model.

  7. The idiosyncratic component of their model is 13.7% over 1979 to 1984, but rises to 62.5% over 1992 to 1998. This is important since Ooi et al. (2009) demonstrate that REIT idiosyncratic risk is positively correlated with returns.

  8. A contrasting view is presented in Chiang (2009), which shows that past returns on public markets can forecast returns in real markets. This result is consistent with the notion that public markets are more efficient in processing information than private markets.

  9. See Geltner et al. (2007) for a textbook discussion.

  10. See Glascock et al. (2000) and Morawski et al. (2008).

  11. See Liu and Mei (1992) and Chiang and Lee (2002).

  12. See Boudry (2011) and Hardin and Hill (2008) for a discussion of REIT dividend policy.

  13. See StataCorp. (2009) for a textbook discussion.

  14. See Lütkepohl (2005) for details.

  15. See Phillips (1987) and Phillips and Perron (1988).

  16. See, for example, Morawski et al. (2008) and Tuluca et al. (2000).

  17. For the REIT (Industrial) and REIT (Apartment) the trace and maximum eigenvalue tests contradict each other. In both cases we assume two cointegrating vectors, since the test statistic indicating a single cointegrating vector is very nearly rejected at the 5% level in the contradictory test.

  18. This is similar to the restriction imposed in Tuluca et al. (2000).

  19. For brevity we include only IRFs for the Aggregate series over the full sample period and the short sample period. Property type IRFs are available on request.

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Acknowledgements

We thank our two referees and the editor for constructive comments. We would like to acknowledge seminar participants at the Florida State University Symposium on Critical Issues in Real Estate and especially our discussant, David Harrison. We have also benefited from the comments of David Downs, David Ling, Charles Trzcinka and Ko Wang. The usual disclaimer applies.

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Authors and Affiliations

  1. School of Hotel Administration, Cornell University, Ithaca, NY, USA

    Walter I. Boudry & Crocker H. Liu

  2. Department of Economics and Department of Risk Management, Pennsylvania State University, University Park, PA, USA

    N. Edward Coulson

  3. Thunderbird Global School of Management and Arizona State University, Glendale, AZ, USA

    Jarl G. Kallberg

Authors
  1. Walter I. Boudry
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  2. N. Edward Coulson
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  3. Jarl G. Kallberg
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  4. Crocker H. Liu
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Correspondence to Walter I. Boudry.

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Boudry, W.I., Coulson, N.E., Kallberg, J.G. et al. On the Hybrid Nature of REITs. J Real Estate Finan Econ 44, 230–249 (2012). https://doi.org/10.1007/s11146-011-9339-7

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