Academic journal article Journal of Real Estate Literature

The Impact of Introducing Reits on Foreign Investments and Liquidity in South Africa

Academic journal article Journal of Real Estate Literature

The Impact of Introducing Reits on Foreign Investments and Liquidity in South Africa

Article excerpt

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Real estate investment trusts (REITs) were first introduced in the United States in 1960 and over the last decades more than 30 countries, including Germany, the United Kingdom, and Japan, introduced REITs.1 REITs enable the respective listed property market to improve its international competitiveness and increasingly attract foreign investors (Ooi, Newell, and Sing, 2006; Schacht and Wimschulte, 2008). The advantages of attracting more foreign investments into the domestic REIT sector are improvements to market liquidity and financing opportunities for REITs (Ooi, Newell, and Sing, 2006), which in turn stimulates not only the public real estate market but also commercial real estate markets.

Previous studies suggest that the introduction of REITs leads to increases in the liquidity and market capitalization of the respective REIT market. In the U.S., the introduction of the new type of REITs in 1993 resulted in subsequent liquidity increases in the REIT market (Clayton and MacKinnon, 2000; Marcato and Ward, 2007). Hereby, market capitalization has been identified as a key driver of liquidity in securitized real estate markets, not only in the U.S., but also in the U.K., Continental Europe, and Australia (Brounen, Eichholtz, and Ling, 2009). The market capitalization of Japanese REITs increased 8.7 times over a five-year period and the number of REITs almost doubled since the introduction of J-REITs in 2001 (Ooi, Newell, and Sing, 2006). The introduction of U.K. REITs at the beginning of 2007 resulted in a significant growth, which led to an aggregated market capitalization of US$ 58 billion within six months and the fourth position in the international REIT market ranking (Anuar and Soi Tho, 2011).

However, increases in liquidity in REIT markets may be driven by domestic or foreign investors. Considering that attracting foreign investors represents a main objective of introducing REITs, the question arises as to whether foreign investors indeed improve the liquidity in a country's new REIT market.

The purpose of this study is to investigate the impact of foreign investments on firm- level liquidity after REITs were introduced. In our investigation, we use South Africa as a laboratory. Compared to countries that use the introduction of REITs as a way to develop their listed property sector, South Africa already had a sophisticated public real estate market prior to the introduction of REITs in 2013. We therefore are able to compare the impact of foreign investments on liquidity in the pre-REIT period (2010:Q1 to 2013:Q1) and in the REIT period (2013:Q3 to 2016:Q1). Therefore, we focus on property companies that were listed prior to 2013 and converted to REITs after REITs were introduced.

Using panel data and Prais-Winsten regression controlling for contemporaneous and serial correlation, we find that foreign investments, as measured by a buy-sell index (BSI), have a significantly positive impact on activity liquidity measures such as turnover and trading volume in the REIT period, but not at all (turnover) or to a smaller degree (trading volume) in the pre-REIT period. Thus, the introduction of REITs in South Africa appears to have improved the liquidity of listed property companies through foreign investor trading. We also find evidence that foreign investor trading had a significantly negative impact on Amihud's (2002) illiquidity measure and bid-ask spread in the pre-REIT period, but this effect disappears in the REIT period. Our results suggest that the introduction of REITs eliminated the impact of foreign investor trading on the tightness and depth of the listed property market in South Africa.

We are the first to investigate the impact of introducing REITs on a country's listed property sector. While others analyze the development of international REIT markets (Ooi, Newell, and Sing, 2006; Schacht and Wimschulte, 2008; Brounen and de Koning, 2012), no one has empirically investigated whether the introduction of REITs achieves the objective of attracting foreign capital and increasing liquidity in a new REIT market. …

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