Academic journal article Journal of Real Estate Literature

International Articles: Market Signals Associated with Taiwan Reit Ipos: Reactions of Non-Reit Real Estate Stocks

Academic journal article Journal of Real Estate Literature

International Articles: Market Signals Associated with Taiwan Reit Ipos: Reactions of Non-Reit Real Estate Stocks

Article excerpt

Abstract

This study examines the influence of real estate investment trust (REIT) initial public offering (IPO) announcements on the returns of non-REIT real estate stocks in Taiwan. In contrast to the Malaysian study of Sing, Ho, and Mak (2002), we find that Taiwan REIT IPOs have favorable effects on these stocks. Moreover, investors can obtain higher abnormal returns from investing in underpriced non-REIT real estate stocks following Taiwan REIT IPO announcements.

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Global real estate securities investing has become increasingly popular in recent years (Bigman and Chiu, 2005; Hughes, 2007), as evidenced by the growth of the number of global real estate funds. At the end of the last decade, only 10 such funds existed; by the end of 2003 that number had doubled to 20, and it more than doubled again to 41 in 2004 (Hughes and Arissen, 2006). As the momentum continued to increase, the number of global funds increased to 68 in 2005 and to 93 in 2006 (National Association of Real Estate Investment Trusts, 2007). To the best of our knowledge, there are 155 global real estate mutual funds as of February 28, 2010 (Yahoo! Finance, 2010).1 To obtain the benefits of global diversification without sacrificing liquidity, global real estate mutual funds invest in both real estate investment trusts (REITs) and non-REIT public real estate stocks.

Because REITs and non-REIT real estate stocks have a common link to the private real estate market (Giliberto, 1990; Chen and Guo, 2004; Lee, Lee, and Chiang, 2008) and both are traded in the stock market, there may be an interaction between these two categories of stocks such that developments in the REIT market may attract the interest of investors in non-REIT real estate stocks and thereby influence the market for those stocks. If the market believes that REIT initial public offerings (IPOs) indicate a likelihood of prosperity for the real estate market, then the IPOs can signal prosperity for the non-REIT real estate stocks. In contrast, if the market believes that the timing of REIT IPOs coincides with the peaks of the real estate market and thus indicates an over-valuation of real estate values, or that REIT IPOs may trigger a transfer of funds away from the non-REIT stocks, then the IPOs will have a negative effect on these stocks.

Understanding how REIT IPOs influence the returns of non-REIT real estate stocks can help real estate securities investors, such as global real estate securities funds, to make better investment decisions. We therefore examine this issue with the hope of offering some implications for the increasingly popular practice of global real estate securities investing. As far as we know, this subject has not drawn much attention, except for the Malaysian study of Sing, Ho, and Mak (2002). The objectives of our study are to examine the return reactions of non-REIT real estate stocks to REIT IPOs and their determinants in Taiwan. By so doing, this study offers contributions in the following three aspects.

First, we extend the scant existing studies to another important emerging market. Taiwan is an important emerging real estate securities market in the Far East. To the best of our knowledge, the existing literature contains neither studies on market signals associated with Taiwan REIT IPOs nor literature describing the impact of REITs on non-REIT real estate stocks in Taiwan. At the end of May 2007, in terms of market capitalization, the Taiwan REIT (non-REIT real estate stock) market accounted for about 37.29% (30.70%) of the Far East Emerging REIT (non-REIT real estate stocks) market (Moss, 2007).2 The importance of the Taiwan market is also reflected in the inclusion of Taiwan in the Dow Jones global real estate indices and the recently launched FTSE EPRA/NAREIT emerging markets indices. The empirical results of this study therefore can be of help to global real estate securities investors who are interested in real estate securities in Taiwan. …

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