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An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

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Abstract

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.

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Acknowledgments

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.

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Authors and Affiliations

  1. Ecole Hôtelière de Lausanne, Route de Cojonnex 18, 1000, Lausanne, Switzerland

    Prashant K. Das

  2. School of Business Administration, Portland State University, 631 SW Harrison St, Portland, OR, 97201, USA

    Julia Freybote

  3. Henley Business School, University of Reading, Greenlands Henley-on-Thames, Oxfordshire, RG9 3 AU, UK

    Gianluca Marcato

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  1. Prashant K. Das
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  2. Julia Freybote
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Correspondence to Julia Freybote.

Appendix

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Table 9 Data Description and Sources
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Table 10 Descriptive Statistics by Period
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Das, P.K., Freybote, J. & Marcato, G. An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market. J Real Estate Finan Econ 51, 160–189 (2015). https://doi.org/10.1007/s11146-014-9490-z

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