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- Title
Why Do REIT Returns Poorly Reflect Property Returns? Unrealizable Appreciation Gains due to Trading Constraints as the Solution to the Short-Term Disparity.
- Authors
Mühlhofer, Tobias
- Abstract
This study addresses the short-term disparity between REIT returns and direct property returns, and argues that this phenomenon is due to the trading constraints in the direct property market imposed on REITs ( the dealer rule). This renders REITs unable to time markets in order to realize short-term property appreciation profits, making REITs primarily a property income investment rather than a full property investment, and explains the observed disparity. Empirically, I find that REIT returns consistently reflect property income returns, but not property appreciation returns. This makes this study the first in the literature to find a consistent link between REIT returns and any portion of direct property returns at short time horizons, in the context of a linear factor model. I then set up a natural laboratory to test the trading-constraints explanation by examining the appreciation dependence of different types of REITs, which should be differently affected by the trading constraints. I find that returns to UPREITs, which are less affected by the constraints, have a stronger appreciation dependence than returns to regular REITs. I also perform a size test and find that large REITs, which are less affected by the constraints, have a stronger appreciation dependence than small REITs. When testing the effects of UPREIT and size characteristics simultaneously, I find a consistent UPREIT effect. I further find that Real Estate Operating Companies (REOCs), which are not subject to trading constraints, show short-term property appreciation dependence. These findings offer strong support for the trading-restrictions explanation.
- Subjects
UNITED States; REAL estate investment trusts; INSTITUTIONAL investors; INVESTMENTS; LIQUIDITY (Economics); REAL estate business
- Publication
Real Estate Economics, 2013, Vol 41, Issue 4, p814
- ISSN
1080-8620
- Publication type
Article
- DOI
10.1111/reec.12001