Abstract
Previous studies of real estate investment trust (REIT) IPOs have focused primarily on REITs listed in the U.S. These studies in general find that, unlike industrial firm IPOs, REIT IPOs in the U.S. exhibit an abnormally low initial-day return and mixed long-run performance. Our study examines this puzzle using a large sample of 370 REIT IPOs from four continents (14 different countries) during the 1996–2010 period. We find that (1) the newly-established REITs in other countries exhibit similar initial-day return pattern as in the U.S., (2) the low initial-day return might be caused by the fund-like structure of REITs and the re-deployable assets (real estate) they hold, (3) the slightly positive initial-day return is offset by the poor performance in the 190 days subsequent to the IPO, and (4) the change in U.S. REIT IPO performance before and after 1990 is likely due to a change in the REIT structure.
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Notes
Consistent with the deadweight cost argument, Peavy (1990) reports that the average initial return of closed-end funds (with no deadweight cost) is insignificant. Edelen and Kadlec (2005) argue that the likelihood of investment bank withdrawal results in the partial adjustment of IPO offer prices to market returns during the waiting period.
As pointed out by an anonymous referee, together with the investor sentiment explanation, the deadweight cost argument might explain the time-series variation in IPO pricing behavior. In a market where investor sentiment is high, the value of the underlying properties will be less important than the influence of market sentiment in determining the REIT offer price.
For example, in the early 2000s, the listed Australian REIT market underwent significant restructuring that led to the emergence of two distinct structures: the traditional unit trust structure and the stapled REIT structure. The latter consists of a unit trust that holds a portfolio of passive assets and a related company that carries out asset management and/or development opportunities. Another example is the Malaysian government’s liberalization of its regulation of foreign ownership and shareholdings in M-REITs in 2009 (see CBRE 2009 research report).
The first is a unit offering in which the first-trading day (given in CRSP) and the offering date (as stated in NAREIT and SDC) are about 6 months apart. The second involves a publicly-listed finance company converting to a REIT and filing to list on the NYSE under a new stock symbol. The third is an existing NASDAQ traded REIT that made a public offering of common stocks and began trading on the NYSE.
Bloomberg provides firm-level data on the percentage of institutional holdings starting only in March 2010. We asked a person who works in the Bloomberg data department about the availability of data for earlier periods. We were told that Bloomberg does not provide historical institutional holdings information for non-U.S. firms.
DataStream also provides dividend information on equity indices in a separate file. However, we find that most of the dividends reported in the file are either errors or blanks. Given this, we believe that the dividend files for the stock market index are not reliable. Since the stock market returns calculated using the stock market price indexes do not include the market dividends, the results of the five countries derived using price indexes should be interpreted with caution.
We use the Wilcoxon signed rank test to see whether the median initial-day return is significantly different from zero.
The large negative market-adjusted CAR observed for South Korea during the 2–30 days is mostly driven by the poor performance of one REIT (Dasan REIT). Interestingly, this REIT has a large run-up in price (70 % initial-day return) on first-day of trading but subsequently its price continues to drop precipitously over the interval of observation. By day 30 after its IPO, its price has dropped about 53 % from 1,700 won (close price on first-trading day) to 804 won.
Since the REIT industry is relatively small in non-U.S. countries (and we do not know how the REIT indexes are constructed), we did not use these indexes as alternative proxies.
The deadweight cost explanation indicates that the value of the underlying properties determines the lower bound of the offering price of a REIT IPO. Given this, the offering price should be higher (lower) if the underlying properties are easier (harder) to value or if there is more (less) liquidity in the market. We thank an anonymous referee for pointing out this direction for future research.
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Acknowledgments
The authors acknowledge helpful comments from Chien-Yun Chang, Yalan Feng, Armen Hovakimian, Mariya Letdin, Graeme Newell, Joseph Ooi, Wenlan Qian, Tien Foo Sing, Jim Shilling, Kang Li Wu, Yinggang Zhou, Andy Naranjo (the editor), three anonymous referees, as well as participants at the 2012 Critical Issues in Real Estate Symposium at the University of Florida, seminars at Baruch College and Massey University, the 2012 GCREC annual meeting in Macau, and the 2012 AsRES annual meeting in Singapore.
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Chan, S.H., Chen, J. & Wang, K. Are REIT IPOs Unique? The Global Evidence. J Real Estate Finan Econ 47, 719–759 (2013). https://doi.org/10.1007/s11146-013-9428-x
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DOI: https://doi.org/10.1007/s11146-013-9428-x