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Time-Varying Betas of US REITs from 1972 to 2013

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Abstract

This study estimates the time-varying REIT betas with a structural time series model using monthly REIT return data for the periods from 1972 to 2013. Based on the FTSE-NAREIT return indices for the equity REIT (EREIT) and mortgage REIT (MREIT), we found corroborative evidence of the temporal declines in the betas of the two REITs up to 1999. The time-varying beta characteristics of the two REIT betas are fundamentally different in the 2000s. While the MREIT betas continued to decline, the EREIT betas showed a sharp reversal of the downward trend. Coinciding with the low interest regime in the US, EREITs used more external debt to fund new acquisitions and development activities, and as a result, the EREIT betas increased sharply in 2000s. The EREIT betas hit the peak in 2009; and declined thereafter when active deleveraging occurred in the market. Using firm level data, we construct two leverage-sorted EREIT portfolios, and our empirical results do not reject the leverage effects on time-varying EREIT betas. However, we find that the leverage effect is not triggered by the declines in stock prices as proposed in the finance literature.

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Notes

  1. Franzoni (2002 and 2008) found that the market betas of value and small-cap stocks in the US decreased by more than 75 % in the second half of the last century.

  2. See the studies such as Ghosh et al. (1996); McIntosh et al. (1991); Khoo et al. (1993); Liang et al. (1995); and Lee et al. (2008).

  3. Sagalyn (1990), Goldstein and Nelling (1999) and Chatrath et al. (2000) found that REIT betas are high in declining markets than in advancing markets. However, Chiang et al. (2004) rejected the asymmetric beta hypothesis after controlling for the three Fama and French (1993) factors.

  4. EREIT betas were correlated with different risk factors over time starting with large-cap stock risk factors in the 1970s, small-cap stock risk factors in the 1980s, and the real estate risk factors in the post-1993 periods. Clayton and MacKinnon (2001, 2003) attribute the changing risk behavior to the maturation of REIT industry.

  5. Jagannathan and Wang (1996) and Lettau and Ludvigson (2001) also showed that constant beta unconditional CAPM model underestimate time-varying beta in the stock markets.

  6. Except for Ghosh et al. (1996), the two earlier studies did not cover the period beyond 1993, which is known as the strong growth phase of US REITs.

  7. Mei and Lee (1994) and Ziering et al. (1997) found a significant real estate risk factor in REIT pricing.

  8. The relaxation of the rules restricting institutional holdings of REITs through the “look-through” provisions in 1993 Tax Reform has been the single most important policy change that has caused the surge in institutional investments into the REIT market.

  9. Being conceived as a defensive vehicle, REITs distribute 90 % of more income generated from their real estate portfolios backs to investors as dividends.

  10. Refer to Harvey (1996) for technical details.

  11. See Fama and French, 1993, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics, for a complete description of the factor returns.

  12. FTSE-NAREIT constructs its REIT indices using a selected sample of all publicly-listed EREITs and MREITs in major US exchanges, where the firm characteristics of the REIT samples are not undifferentiated.

  13. There were 200 firms (REITs) identified by SIC 6798 in the CRSP/Compustat merged file as in 2013, of which 162 were equity REITs and 38 were mortgage REITs. The mortgage REITs are not used due to the small number of MREITs. 5 of the equity REITs do not have debt information, and are dropped from the sample, and we end up with the final list of 157 equity REITs.

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Acknowledgments

We would like to thank Zhonghua Wu and Jim Shilling for comments and suggestions. The paper was presented at the Asia-Pacific Real Estate Research Symposium in 2012. We would also like to thank the anonymous referee for his/her valuable comments and suggestions, which have been most helpful in the revision of the paper. The errors, if any, remain the responsibilities of the authors.

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Authors and Affiliations

  1. Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore, 117566, Singapore

    Tien Foo Sing

  2. Department of Finance, National University of Kaohsiung, Kaohsiung City, Taiwan, Republic of China

    I-Chun Tsai

  3. Department of Finance, National Chengchi University, Taipei City, Taiwan, Republic of China

    Ming-Chi Chen

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  1. Tien Foo Sing
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Correspondence to Tien Foo Sing.

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Sing, T.F., Tsai, IC. & Chen, MC. Time-Varying Betas of US REITs from 1972 to 2013. J Real Estate Finan Econ 52, 50–72 (2016). https://doi.org/10.1007/s11146-015-9502-7

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