The Environment and Performance of Real Estate Investment Trusts
Zietz, Emily N., Sirmans, G. Stacy, Friday, H. Swint, Journal of Real Estate Portfolio Management
Executive Summary. Researchers have been interested in investigating the role of Real Estate Investment Trusts (REITs) in institutional portfolios since their debut in the financial market over four decades ago. The cyclical popularity and performance of various types of REITs as well as the availability of daily returns data for REITs have provided researchers a fruitful and unique area of examination. This study explores the recent financial economics literature on the environment and performance of REITs by extending the 1995 work of Corgel, McIntosh and Ott.
Real Estate Investment Trusts (REITs) entered the financial markets as closed-end publicly-traded stock companies based on 1960 federal legislation that allows their existence within specific structural and dispositional requirements. The various REIT corporate forms allow investors to hold portfolios of highly illiquid real estate assets while simultaneously enjoying traditional stock market liquidity and marketability advantages. Academic studies have examined REITs from both empirical and theoretical angles. Often these studies find mixed results on the performance and returns generated by REITs.
A common area of interest in REITs is whether they perform as real estate or as common stocks. Results presented in this study should be especially interesting given the recent developments in both national and global financial markets and changes in regulation involving REITs. Also, many studies have examined the performance of REITs in a well-diversified portfolio. Qualitative results as well as statistical summaries will be provided of studies focusing on such areas as the returns of REITs versus other assets and the hedging ability and riskiness of REITs.
This paper extends the previous survey by Corgel, McIntosh and Ott (1995) that examined the REIT literature through 1994. The recent research on REITs is organized into four broad categories: (1) the general environment of REITs, including an examination of regulatory and financial market changes; (2) investment decisions and REITs; (3) financing decisions involving REITs; and (4) risk and return performance of REITs. Within the four categories the literature is organized into subcategories when a sufficient number of studies have a common theme. The investment decisions and REITs phase of this study includes subsections on (a) asset acquisition and disposition issues and (b) corporate structure and REITs. Similarly, the portion of this study addressing financing decisions involving REITs includes subcategories on (a) dividend policy and REITs; (b) REITs in capital structure; (c) agency costs in REITs; (d) initial public offerings; and (e) REITs in capital budgeting. Studies relating to the fourth broad category, risk and return performance of REITs, are organized according to (a) return issues; (b) risk and diversification; (c) the hedging ability of REITs; and (d) the relationship between REIT returns and macroeconomic variables. A summary of each study and the most significant findings from the literature are outlined in tabular form for easier comparison between studies and findings.
This study facilitates a better understanding and comparison of the plethora of literature on REITs by organizing results that are both consistent as well as contradictory. Daily return data available for REITs and not other real estate products has facilitated a unique and expanding arena for real estate research. For example, REIT data can be used to make comparisons of the performance of securitized and unsecuritized real estate in a portfolio, agency costs and obstacles, and the performance of REITs relative to other financial assets. Nearly one hundred and forty studies that have been published since the Corgel, McIntosh and Ott (1995) paper are summarized here. The results should be useful to both academicians and practitioners.
Literature Review on Investment Issues
Much of the real estate and REIT financial economics literature focuses on the investment characteristics of REITs. …