Skip to main content
SpringerLink
Log in

REIT Momentum and Characteristic-Related REIT Returns

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

Recent evidence confirms that in factor-model examinations of the cross-section of REIT returns, REIT momentum emerges as the dominant driver. Acknowledging the importance of momentum, the current study explores whether and how REIT return patterns are linked to the underlying characteristics of the REITs themselves, in the manner of Daniel and Titman’s (Journal of Finance 52(1):1–33, 1997, Journal of Portfolio Management 24(4):24–33, 1998) characteristics model. Over the period 1993 through 2009, we find that after controlling for momentum, book-to-market, institutional ownership, and illiquidity are all strongly associated with REIT returns while size and analyst coverage are not. We further extend prior research by examining the influence of changes in interest rate cycles on REIT returns, and find that the characteristic-return relationships are heavily influenced by interest rates.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. For robustness, in untabulated results we conducted our analysis on all non-REIT firms with market capitalizations greater than $75 million. We find results consistent with prior literature in that returns have a significantly positive relationship with momentum and illiquidity and a significantly negative relationship with institutional ownership and analyst coverage. Size and book-to-market have the expected signs but are insignificant.

  2. We are not aware of a critical examination of the factor model methodology that focuses solely on REITs.

  3. See Phalippou (2008) for recent evidence.

  4. We do not examine idiosyncratic volatility for several reasons. First, measuring idiosyncratic risk requires, by definition, an assumed factor (risk) model. We are, however, simply examining return differences on portfolios with different characteristics, a la Daniel and Titman (1998), and choose to remain agnostic regarding factor models. Second, Hung and Glascock (2010) provide evidence that differences in idiosyncratic risk are positively related to momentum returns, which we implicitly control for in our double sorting procedures.

  5. There is little disagreement that the financial crisis of the last few years has had a major impact on financial markets and participants’ investment decisions. Whether ‘this time is different’ is debatable, and not something we are prepared to take up in this study. We do, however, wish to allow for the possibility that the crisis might have produced anomalous and unknown pricing relationships during this period. To that end, we initially select August 2007 as the end of the sample because it is the first month (during the crisis period) that the Federal Reserve’s FOMC conducted unscheduled meetings (two in fact), and the first cut in policy rates came in this month (i.e., the prior policy rate change was an increase in July 2006). This change-in-direction in Federal Reserve policy rates becomes important in our subsequent analyses. In unreported results using this truncated sample, we find qualitatively similar results to those reported over the full period. Similarly, we selected 1993 as the beginning of the full sample as this is the beginning of the modern REIT era. In the Appendix we report the summary statistics and results of the analysis incorporating the earlier REIT sample beginning in 1982 and running through 1992.

  6. Our liquidity measure is analogous to LM12 from Liu (2006). Our liquidity measure is highly correlated with the standard turnover measures with correlation coefficients between 0.60 and 0.80, depending on the turnover measure and time period used. However, we prefer LM12 because it incorporates several dimensions of liquidity, which include turnover, the continuity of trade or lock in risk, the trading quantity, and the cost of trading. See Liu (2006) for a more thorough discussion.

  7. For robustness, we also examined portfolios where the sample was sorted into fifths or halves. Qualitatively similar results were found using both methodologies and are not reported. While using fifths often increases the spread between high and low portfolios, the reduction in observations in each portfolio also increases the likelihood that the results can be driven by an outlier. We feel that using thirds is more informative than halves because it demonstrates a relationship’s monotonicity or lack thereof.

  8. This difference in calculations is why the Momentum returns we report are not as large as those found in previous studies.

  9. We thank an anonymous referee for bringing this point to our attention.

  10. Recent studies find that there may be additional drivers of cap rates, such as investor sentiment (Clayton et al. 2009) or growth of debt within the economy (Chervachidze and Wheaton 2010).

  11. One possible explanation for this observed result is the unique regulatory environment in which REITs operate. Specifically, in order to retain pass-through status with regard to federal income taxation, REITs must distribute at least 90 % of taxable income to their shareholders in the form of dividends. As such, REITs generally cannot fund growth endogenously through retained earnings and must therefore systematically return to the capital markets. Thus, in periods of restrictive credit, large, transparent REITs may have an easier time continuing to obtain credit on favorable terms. See, for example, Capozza and Seguin (1999), Ambrose and Linneman (2001) and Danielsen et al. (2009).

References

  • Ambrose, B., & Linneman, P. (2001). REIT organizational structure and operating characteristics. Journal of Real Estate Research, 21(3), 141–162.

    Google Scholar 

  • Becher, D., Jensen, G., & Mercer, J. (2008). Monetary policy indicators as predictors of stock returns. Journal of Financial Research, 31(4), 357–379.

    Article  Google Scholar 

  • Brennan, M., Chordia, T., & Subrahmanyam, A. (1998). Alternative factor specifications, security characteristics, and the cross-section of expected stock returns. Journal of Financial Economics, 49(3), 345–373.

    Article  Google Scholar 

  • Buetow, G., & Johnson, R. (2001). The real estate asset allocation decision: monetary policy implications. Journal of Real Estate Portfolio Management, 7(3), 215–223.

    Google Scholar 

  • Buetow, G., Fabozzi, F., & Henderson, B. (2009). Monetary policy and interest rate factors. Journal of Fixed Income, 19(2), 63–70.

    Article  Google Scholar 

  • Cannon, S., & Cole, R. (2011). Changes in REIT liquidity 1988-2007: evidence from daily data. Journal of Real Estate Finance and Economics, 43(1–2), 258–280.

    Article  Google Scholar 

  • Capozza, D., & Seguin, P. (1999). Focus, transparency and value: the REIT evidence. Real Estate Economics, 27(4), 587–619.

    Article  Google Scholar 

  • Carhart, M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(1), 57–82.

    Article  Google Scholar 

  • Chang, K., Chen, N., & Leung, C. (2011). Monetary policy, term structure and asset return: comparing REIT, housing and stock. Journal of Real Estate Finance and Economics, 43(1–2), 221–257.

    Article  Google Scholar 

  • Chen, M., Peng, C., Shyu, S., & Zeng, J. (2011). Market states and the effect on equity REIT returns due to changes in monetary policy stance. Journal of Real Estate Finance and Economics. doi:10.1007/s11146-010-9264-1.

  • Chervachidze, S., & Wheaton, W. (2010). What determined the great cap rate compression of 2000–2007, and the dramatic reversal during the 2008-2009 financial crisis? Journal of Real Estate Finance and Economics. doi:10.1007/s11146-011-9334-z.

  • Chui, A., Titman, S., & Wei, K. (2003a). The cross section of expected REIT returns. Real Estate Economics, 31(3), 451–479.

    Article  Google Scholar 

  • Chui, A., Titman, S., & Wei, K. (2003b). Intra-industry momentum: the case of REITs. Journal of Financial Markets, 6(3), 363–387.

    Article  Google Scholar 

  • Clayton, J., & MacKinnon, G. (2000). Measuring and explaining changes in REIT liquidity: moving beyond the bid-ask spread. Real Estate Economics, 28(1), 89–115.

    Article  Google Scholar 

  • Clayton, J., Ling, D., & Naranjo, A. (2009). Commercial real estate valuation: fundamentals versus investor sentiment. Journal of Real Estate Finance and Economics, 38(5), 5–37.

    Article  Google Scholar 

  • Daniel, K., & Titman, S. (1997). Evidence on the characteristics of cross-sectional variation in common stock returns. Journal of Finance, 52(1), 1–33.

    Article  Google Scholar 

  • Daniel, K., & Titman, S. (1998). Characteristics or covariance? Journal of Portfolio Management, 24(4), 24–33.

    Article  Google Scholar 

  • Daniel, K., Titman, S., & Wei, K. K. J. (2001). Explaining the cross-section of stock returns in Japan: factors or characteristics? Journal of Finance, 56(2), 743–766.

    Article  Google Scholar 

  • Danielsen, B., Harrison, D., Van Ness, R., & Warr, R. (2009). REIT auditor fees and financial market transparency. Real Estate Economics, 37(3), 515–557.

    Article  Google Scholar 

  • Darrat, A., & Glascock, J. (1989). Real estate returns, money and fiscal deficits: is the real estate market efficient? Journal of Real Estate Finance and Economics, 2(3), 197–208.

    Article  Google Scholar 

  • Davis, J. L., Fama, E. F., & French, K. R. (2000). characteristics, covariances, and average returns: 1929 to 1997. Journal of Finance, 55(1), 389–406.

    Article  Google Scholar 

  • Derwall, J., Huij, J., Brounen, D., & Marquering, W. (2009). REIT momentum and the performance of real estate mutual funds. Financial Analysts Journal, 65(5), 24–34.

    Article  Google Scholar 

  • Devos, E., Ong, S., & Spieler, A. (2007). Analyst activity and firm value: evidence from the REIT sector. Journal of Real Estate Finance and Economics, 25(3), 333–356.

    Article  Google Scholar 

  • Diether, K., Malloy, C., & Scherbina, A. (2002). Differences of opinion and the cross section of stock returns. Journal of Finance, 57(5), 2113–2141.

    Article  Google Scholar 

  • Fama, E., & French, K. (1992). The cross-section of expected stock returns. Journal of Finance, 47(2), 427–465.

    Article  Google Scholar 

  • Fama, E., & French, K. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.

    Article  Google Scholar 

  • Fama, E., & French, K. (2011). Size, Value, and Momentum in International Stock Returns. Fama-Miller Working Paper; Tuck School of Business Working Paper No. 2011-85; Chicago Booth Research Paper No. 11–10. Available at SSRN: http://ssrn.com/abstract=1720139.

  • Feng, Z., Price, S., & Sirmans, C. F. (2011). An overview of Equity Real Estate Investment Trusts (REITs): 1993–2009. Journal of Real Estate Literature, 19(2), 307–343.

    Google Scholar 

  • Hong, H., Lim, T., & Stein, J. (2000). Bad news travels slowly: size, analyst coverage, and the profitability of momentum strategies. Journal of Finance, 55(1), 265–295.

    Article  Google Scholar 

  • Hung, S., & Glascock, J. (2008). Momentum profitability and market trend: evidence from REITs. Journal of Real Estate Finance and Economics, 37(1), 51–69.

    Article  Google Scholar 

  • Hung, S., & Glascock, J. (2010). Volatilities and momentum returns in real estate investment trusts. Journal of Real Estate Finance and Economics, 41(2), 126–149.

    Article  Google Scholar 

  • Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: implications for stock market efficiency. Journal of Finance, 48(1), 65–91.

    Article  Google Scholar 

  • Jensen, G., & Mercer, J. (2002). Monetary policy and the cross-section of expected stock returns. Journal of Financial Research, 25(1), 125–139.

    Article  Google Scholar 

  • Jensen, G., & Moorman, T. (2010). Inter-temporal variation in the illiquidity premium. Journal of Financial Economics, 98(2), 338–358.

    Article  Google Scholar 

  • Jensen, G., Mercer, J., & Johnson, R. (1996). Business conditions, monetary policy, and expected security returns. Journal of Financial Economics, 40(2), 213–237.

    Article  Google Scholar 

  • Korajczyk, R., & Sadka, R. (2008). Pricing the commonality across alternative measures of liquidity. Journal of Financial Economics, 87(1), 45–72.

    Article  Google Scholar 

  • Lewellen, J., Nagel, S., & Shanken, J. (2010). A skeptical appraisal of asset pricing tests. Journal of Financial Economics, 96(2), 175–194.

    Article  Google Scholar 

  • Liu, W. (2006). A liquidity-augmented capital asset pricing model. Journal of Financial Economics, 82(3), 631–671.

    Article  Google Scholar 

  • Mueller, G., & Pauley, K. (1995). The effect of interest-rate movements on real estate investment trusts. Journal of Real Estate Research, 10(3), 319–326.

    Google Scholar 

  • Nagel, S. (2005). Short sales, institutional investors and the cross-section of stock returns. Journal of Financial Economics, 78(2), 277–309.

    Article  Google Scholar 

  • Peterson, J. D., & Hsieh, C. H. (1997). Do common risk factors in the returns on stocks and bonds explain returns on REITs? Real Estate Economics, 25(2), 321–345.

    Article  Google Scholar 

  • Phalippou, L. (2008). Where is the value premium? Financial Analysts Journal, 64(2), 41–48.

    Article  Google Scholar 

  • Wang, K., Erickson, J., Gau, G., & Chan, S. (1995). Market microstructure and real estate returns. Real Estate Economics, 23(1), 85–100.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Rawls College of Business, Texas Tech University, Lubbock, TX, 79409-2101, USA

    Paul R. Goebel, David M. Harrison & Jeffrey M. Mercer

  2. Jon M. Huntsman School of Business, Utah State University, Logan, UT, 84322, USA

    Ryan J. Whitby

Authors
  1. Paul R. Goebel
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. David M. Harrison
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jeffrey M. Mercer
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Ryan J. Whitby
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Paul R. Goebel.

Appendix

Appendix

1982 to 1992 Subsample

Table 7 Panel A: summary statistics
Full size table
Table 8 Panel B: characteristic sorted REIT returns 1982-1992
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Goebel, P.R., Harrison, D.M., Mercer, J.M. et al. REIT Momentum and Characteristic-Related REIT Returns. J Real Estate Finan Econ 47, 564–581 (2013). https://doi.org/10.1007/s11146-012-9371-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11146-012-9371-2

Keywords

Search

Navigation