The Historical Performance of Real Estate Investment Trusts

This empirical study investigates the performance of Real Estate Investment Trusts (REITs). Although many people have studied REIT performance, their findings on the long-term performance of REITs are generally inconclusive. The objectives of this study are: (1) to evaluate the long-term (1970-1993) performance of REITs; (2) to examine the stability of REIT performance over time; and (3) to investigate the sensitivity of a specific performance measure, the Jensen index, to two general performance benchmarks and two REIT samples. The results indicate that the performance of the REIT portfolios was consistent with the security market line for the 1970-1993 period. However, REIT performance varied over the period. This study also found that the use of the unrepresentative S&P 500 index as a performance benchmark tends to overstate REIT performance. Finally, survivor REITs in general performed better than the overall REIT population.

Does the REIT Stock Market Resemble the General Stock Market?

Gyourko and Keim (1993) point out that the continued growth of the Real Estate Investment Trust (REIT) market depends critically on the stock market's ability to provide fair and accurate valuations of real estate. Given the recent surge of REIT initial public offerings (more than $15 billion in the 1993-1994 period), it is important to know whether the stock market provides the REIT market with the same level of information dissemination, monitoring activities, and pricing mechanisms as that for other stocks. This study demonstrates that, when compared with the general stock market, REIT stocks tend to have a smaller turnover ratio, a lower level of institutional investor participation, and are followed by fewer security analysts. Furthermore, the level of financial analysts coverage and stock turnover intensity are higher when the REIT stock market is "hot." The lack of attention from financial analysts and institutional investors in the REIT stock market may have some implications for the well-documented anomalous REIT stock performance.

Intertemporal Changes in the Riskiness of REITs

This study investigates the variability in the risk components of REITs over the 1973-1989 period using the cusum test, the cusum of squares test, and the Quandt's log-likelihood ratio method. Four REIT portfolios were formed: an all-REIT portfolio, an equity REIT portfolio, a hybrid REIT portfolio, and a mortgage REIT portfolio. The two-index model was employed and the results indicated that both the market beta and the interest-rate beta of the portfolios were time-varying. In addition, significant shifts in return-generating regimes over time were detected for all four portfolios.

Serial Persistence in Equity REIT Returns

Annual and monthly REIT returns display statistically significant serial persistence, although the two types of persistence behavior are qualitatively different. By contrast, quarterly REIT returns do not display serial persistence. This strongly suggests that linear multifactor market models cannot describe REIT investment behavior. Annual REIT returns fail to reflect corresponding persistence behavior in underlying real estate returns precisely when the REITs are large enough to attract institutional investor interest. Institutional investors move in and out of large-capitalization REITs in ways that negatively impact investment returns.

Ownership Structure, Property Performance, Multifamily Properties and REITs

This research extends literature that empirically evaluates the impact of ownership and management structure on property level performance. The results show that multifamily properties owned and managed by real estate investment trusts (REITs) generate higher effective rents at the property level than non-REIT-owned properties. After controlling for positive operating scale and brand effects, REIT property level performance is better than non-REIT property level performance in the market studied. The REIT structure represents diversified scale operators with property management skills. The results imply that the structure of property ownership can impact property performance.

Institutional Investment in REITs: Evidence and Implications

It has been documented that institutional investors did not participate actively in the real estate investment trust (REIT) stock market prior to 1990 and that the percentage of institutional holdings of a REIT stock is positively correlated with the performance of the REIT stock. This article documents a reversal in trend in institutional investors’ preference for investing in REIT stocks and in other stocks. The study shows that prior to 1990, institutional investors invested more of their funds in other stocks than in REITs, whereas after 1990 they invest more of their funds in REITs than in other stocks in the market. The strategies of institutional investors investing in REITs are also analyzed. The findings of the study have implications for the agency and corporate control issues prevailing in the REIT stock market.

Apartment REITs and Apartment Real Estate

This study employs a "hedged" apartment REIT index to track the performance of apartment real estate and to assess the performance of apartments in efficient mixed-asset portfolios consisting of stocks, bonds and real estate. The hedged apartment index reflects the returns of apartment REITs after the effects of equity REITs and the stock market are removed from the apartment REIT returns. It is demonstrated that the hedged apartment REIT index captures a substantial amount of the volatility unique to apartment real estate. Furthermore, the hedged apartment REIT index does not suffer from the appraisal-smoothing problem and the apparent seasonality of appraisal-based indices, such as the Russell-NCREIF apartment index. Therefore, it would appear that the hedged apartment REIT index can be employed as a proxy for apartment real estate in portfolio allocation decisions. This study provides evidence that apartment real estate should be a candidate for some efficient mixed-asset portfolios.

REIT Pricing Efficiency; Should Investors Still Be Concerned?

This study examines the impact of the REIT boom on the market microstructure of REIT common stocks. We analyze NYSE-traded REITs during the pre-boom period (1992) and the post-boom period (1994), and find significant reductions in bid/ask spreads over the period. We also find that the bid/ask spread differential between REITs and non-REITs has been roughly halved between 1991 and 1994. These reductions provide a direct benefit to REIT investors in terms of reduction in transaction costs and improved liquidity, and suggest that the level of uncertainty on the part of the REIT specialist has been reduced.

On The Comovement of REIT Prices

This study examines the comovement of equity real estate investment trust (REIT) prices in both the vintage (1980–1991) and the new (1992–2004) REIT eras. The results indicate that the comovement of equity REIT prices within the same property type has strengthened during the new REIT era. The results also indicate that, all else being equal, a high institutional participation, a low insider ownership, and a large market capitalization are associated with a high within-property-type price synchronicity. The evidence is consistent with two notions: (1) that increasing participation by institutional investors in the new REIT era facilitates the pricing of property-type common information on firm-level prices, and (2) that REITs’ information openness to institutional investing plays a role in this strengthened pricing relationship.