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.
This is a preview of subscription content, log in to check access.
Buy single article
Instant access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of Financial Economics, 77, 375–410.
Ambrose, B. W., Lee, D. W., & Peek, J. (2007). Comovement after joining an index: spillovers of nonfundamental effects. Real Estate Economics, 35(1), 57–90.
Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets, 5, 31–56.
Amihud, Y., & Mendelson, H. (1986). Asset pricing and the Bid-Ask spread. Journal of Financial Economics, 17, 223–249.
Amihud, Y., Mendelson, H., & Wood, R. A. (1990). Liquidity and the 1987 stock market crash. Journal of Portfolio Management, 16(3), 65–69.
Anand, A., Chakravarty, S., & Martell, T. (2005). Empirical evidence on the evolution of liquidity: choice of market versus limit orders by informed and uninformed traders. Journal of Financial Markets, 8, 289–309.
Badrinath, S. G., & Wahal, S. (2002). Momentum trading by institutions. Journal of Finance, 57(6), 2449–2478.
Baker, M., & Stein, J. C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7, 271–299.
Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns. Journal of Finance, 61(4), 1645–1680.
Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives, 21(2), 129–151.
Baker, M., & Wurgler, J. (2012). Comovement and predictability relationships between bonds and the cross-section of stocks. Review of Asset Pricing Studies, 2(1), 57–87.
Barberis, N., & Shleifer, A. (2003). Style investing. Journal of Financial Economics, 68, 161–199.
Barberis, N., Shleifer, A., & Wurgler, J. (2005). Comovement. Journal of Financial Economics, 75, 283–317.
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.
Beber, A., Brandt, M. W., & Kavajecz, K. A. (2009). Flight-to-quality or flight-to-liquidity? evidence from the euro-area bond market. Review of Financial Studies, 22(3), 925–957.
Below, S. D., Stansell, S. R., & Coffin, M. (2000). The determinants of REIT institutional ownership: tests of the CAPM. Journal of Real Estate Finance and Economics, 21(3), 263–278.
Bianchi, D., & Guidolin, M. (2014). Can linear predictability models time bull and bear real estate markets? Out-of-sample evidence from REIT portfolios. Journal of Real Estate Finance and Economics, 49(1), 116–164.
Brooks, C., & Tsolacos, S. (1999). The impact of economic and financial factors on UK property performance. Journal of Property Research, 16(2), 139–152.
Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and asset valuation. Journal of Business, 78(2), 405–440.
Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity. The Review of Financial Studies, 22(6), 2201–2238.
Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57–82.
Chen, H.-L., & Bondt, W. D. (2004). Style momentum within the S&P-500 index. Journal of Empirical Finance, 22, 483–507.
Chen, N.-F., Kan, R., & Miller, M. H. (1993). Are the discounts on closed-End funds a sentiment index? Journal of Finance, 48(2), 795–800.
Chiang, K. C. H., & Lee, M.-L. (2009). The role of correlated trading in setting REIT prices. Journal of Real Estate Finance and Economics, 41, 320–338.
Choi, N., & Sias, R. W. (2009). Institutional industry herding. Journal of Financial Economics, 94, 469–491.
Ciochetti, B. A., Craft, T. M., & Shilling, J. D. (2002). Institutional Investors’ preferences for REIT stocks. Real Estate Economics, 30(4), 567–593.
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. 106
Clayton, J., & MacKinnon, G. (2003). The relative importance of stock, bond and real estate factors in explaining REIT returns. Journal of Real Estate Finance and Economics, 27(1), 39–60.
Clayton, J., Ling, D. C., & Naranjo, A. (2009). Commercial real estate valuation: fundamentals versus investor sentiment. Journal of Real Estate Finance and Economics, 38, 5–37.
Connolly, R. A., Stivers, C., & Sun, L. (2007). Commonality in the time-variation of stock-stock and stock–bond return comovements. Journal of Financial Markets, 10, 192–218.
De Long, J. B., & Shleifer, A. (1992). Closed-end fund discounts. Journal of Portfolio Management, 18(2), 46–53.
De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1989). The size and incidence of the losses from noise trading. Journal of Finance, 44(3), 681–696.
De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703–738.
Devos, E., Ong, S.-E., Spieler, A. C., & Tsang, D. (2013). REIT institutional ownership dynamics and the financial crisis. Journal of Real Estate Finance and Economics, 47, 266–288.
Dhar, R., & Goetzmann, W. N. (2006). Institutional perspectives on real estate investing. Journal of Portfolio Management, 32(4), 106–116.
Doukas, J. A., & Milonas, N. T. (2004). Investor sentiment and the closed-end fund puzzle: Out-of-sample evidence. European Financial Management, 10(2), 235–266.
Elton, E. J., Gruber, M. J., & Busse, J. A. (1998). Do investors care about sentiment? Journal of Business, 71(4), 477–500.
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.
Fei, P. D., Ding, L., & Deng, Y. (2010). Correlation and volatility dynamics in REIT returns: performance and portfolio considerations. Journal of Portfolio Management, 36(2), 113–125.
Froot, K. A., & Dabora, E. M. (1999). How are stock prices affected by the location of trade? Journal of Financial Economics, 53, 189–216.
Froot, K., & Teo, M. (2008). Style investing and institutional investors. Journal of Financial and Quantitative Analysis, 43(4), 883–906.
Gallimore, P., & Gray, A. (2002). The role of investor sentiment in property investment decisions. Journal of Property Research, 19(2), 111–120.
Gemmill, G., & Thomas, D. C. (2002). Noise trading, costly arbitrage, and asset prices: evidence from closed-end funds. Journal of Finance, 57(6), 2571–2594.
Giliberto, S. M. (1990). Equity real estate investment trusts and real estate returns. Journal of Real Estate Research, 5(2), 259–263.
Glushkov, D., Moussawi, R., & Palacios, L. (2009). Institutional Ownership, Concentration, and Breadth Ratios Using Thomson Reuters 13F Data. WRDS Paper
Goyenko, R. Y., & Ukhov, A. D. (2009). Stock and bond market liquidity: a long-Run empirical analysis. Journal of Financial and Quantitative Analysis, 44(1), 189–212.
Graff, R. A., & Young, M. S. (1997). Serial persistence in equity REIT returns. Journal of Real Estate Research, 14(3), 183–214.
Green, T. C., & Hwang, B.-H. (2009). Price-based return comovement. Journal of Financial Economics, 93, 37–50.
Ilmanen, A. (2003). Stock–bond correlations. Journal of Fixed Income, 13(2), 55–66.
Knotek, E. (2007). How useful is Okun’s Law? federal reserve bank of Kansas city. Economic Review, 73–103.
Kumar, A., & Lee, C. M. C. (2006). Retail investor sentiment and return comovements. Journal of Finance, 66(5), 2451–2486.
Lee, C. M. C., Shleifer, A., & Thaler, R. H. (1991). Investor sentiment and the closed-End fund puzzle. Journal of Finance, 46(1), 75–109.
Lee, M.-L., Lee, M.-T., & Chiang, K. C. H. (2008). Real estate risk exposure of equity real estate investment trusts. Journal of Real Estate Finance and Economics, 36, 165–181.
Lin, C. Y., Rahman, H., & Yung, K. (2009). Investor sentiment and REIT returns. Journal of Real Estate Finance and Economics, 39, 450–471.
Ling, D. C., Naranjo, A., & Scheick, B. (2013). Investor Sentiment, Limits to Arbitrage, and Private Market Returns. Real Estate Economics, in press.
Liu, W. (2006). A liquidity-augmented capital asset pricing model. Journal of Financial Economics, 82, 631–671.
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.
Neal, R., & Wheatley, S. M. (1998). Do Measures of Investor Sentiment Predict Returns?. Journal of Financial And Quantitative Analysis, 33 (4), 523:547.
Nofsinger, J. R., & Sias, R. W. (1999). Herding and feedback trading by institutional and individual investors. Journal of Finance, 54(6), 2263–2295.
Pagliari, J. L., Jr., Scherer, K. A., & Monopoli, R. T. (2005). Public versus private real estate equities: a more refined, long-term comparison. Real Estate Economics, 33(1), 147–187.
Pástor, L., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal of Political Economy, 111(3), 642–685.
Pindyck, R. S., & Rotemberg, J. J. (1990). The excess Co-movement of commodity prices. Economic Journal, 100, 1173–1189.
Pindyck, R. S., & Rotemberg, J. J. (1993). The comovement of stock prices. Quarterly Journal of Economics, 108(4), 1073–1103.
Ro, S., & Gallimore, P. (2013). Real estate mutual funds: herding, momentum-trading and performance. Real Estate Economics, 42(1), 190–222.
Schiller, R. J. (1989). Comovements in stock prices and comovements in dividends. Journal of Finance, 44(3), 719–729.
Sias, R. W. (2004). Institutional herding. Review of Financial Studies, 17(1), 165–206.
Sias, R. W., Starks, L. T., & Tinic, S. M. (2001). Is noise trader risk priced? Journal of Financial Research, 24(3), 311–329.
Teo, M., & Woo, S.-J. (2004). Style effects in the cross-section of stock returns. Journal of Financial Economics, 74, 367–398.
Vayanos, D. (2004). Flight to Quality, Flight to Liquidity, And the Pricing of Risk. NBER working paper 10327.
Wahal, S., & Yavuz, M. D. (2013). Style investing, comovement and return predictability. Journal of Financial Economics, 107, 136–154.
Yu, J., & Yuan, Y. (2011). Investor sentiment and the mean-variance relation. Journal of Financial Economics, 100(2), 367–381.
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.
About this article
Cite this article
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
- Institutional investor sentiment
- Flight to liquidity
- Style investing
- Asset pricing
- Real estate