We examine whether property market liquidity impacts the choice between secured and unsecured debt. A sample of real estate investment trusts (REITs) allows us to estimate the market liquidity of a REIT’s underlying assets and the debt secured by those assets (or unsecured). Using an instrumental variables approach, we find a positive relationship between a REIT’s property market liquidity and its use of unsecured debt relative to secured debt - when a REIT has greater exposure to more liquid underlying property markets, it is more likely to rely on unsecured debt. We investigate several aspects of this relationship including the debt level, issuances, and property loan-to-value ratio. In each case, we find support for our main result. Likewise, our results are robust to (a) using alternative instruments; (b) controlling for REITs’ unencumbered assets, as well as asset quality and redeployability; (c) controlling for credit market conditions; (d) accounting for real estate market conditions; (e) excluding firms that focus on residential real estate; and (f) adding stock market liquidity. Our study highlights the importance of property market liquidity in the debt structure of REITs.

We find evidence that asset market liquidity impacts a firm’s choice between secured and unsecured debt. We use real estate firm data and instrumental variables to estimate a proxy for an individual firm’s exposure to the underlying market liquidity of its assets. We find a positive relationship between the underlying asset market liquidity of a firm and its unsecured-to-total-debt ratio; that an increase in a firm’s asset market liquidity leads to a positive incremental change in its unsecured debt; and that when a firm’s underlying asset markets are more liquid, it is more likely to issue unsecured corporate bonds. Our results remain robust to (a) examining alternative asset market liquidity measures, (b) adjusting for liquidity shocks, (c) controlling for asset quality and redeployability, (d) adding stock market liquidity, (e) capturing the level of unencumbered assets, and (f) excluding firms that focus on residential asset investment.

Vacancy refers to an investment property’s unrealized income potential. Yet, is it always the case that vacancy is a drag on value? In this article, the authors examine whether and to what extent the vacancy of commercial real estate is related to its valuation and investment performance. The testable implications are discussed for either a growth or a risk effect in the data, along with an empirical analysis covering over 12,000 individual properties, spanning three decades. The evidence is consistent with theory supporting the optionality of vacant space. Specifically, the authors find that high-vacancy properties are associated with lower capitalization rates. The negative relationship can be explained by the net operating income (NOI) growth channel (i.e., an expectation for high NOI growth from the potential occupancy of vacant space), which dominates the risk channel (i.e., a higher perceived risk in the property valuation). They also find evidence that the investment performance of high-vacancy properties is inferior to the performance of low-vacancy properties, on average. Overall, these results suggest that vacant space has option value; although, on average, the option is overvalued.

Real Estate Investment Trusts (REITs) are a globally recognized form of real estate ownership that offer tax benefits at a corporate level. Despite their clear advantages, however, a significant share of potentially eligible Real Estate Operating Companies (REOCs) do not opt for conversion to a REIT structure. This paper examines 80 REOC-to-REIT conversions across 13 countries. We find REIT conversions are generally driven by the extent of country-specific tax benefits. They are also more likely following prior conversions by other REOCs, and in countries with a larger share of extant REITs. REIT conversions may be motivated by Net Asset Value (NAV) discounts, especially if management's compensation is highly equity-based. This illustrates the importance of aligning the interests of management and shareholders. On the other hand, relatively restrictive REIT criteria, such as the disclosure and taxation of hidden values during the conversion process, are associated with significantly lower conversion probabilities. Countries that have eased REIT criteria have subsequently seen significantly more conversions.

This article examines the conversion-related mergers and acquisitions (M&A) activity and post-conversion performance of 80 international Real Estate Operating Companies (REOCs) that adopted Real Estate Investment Trust (REIT) status. In the years prior to the conversion, we document an increased M&A deal activity that is in part driven to fulfill regulatory REIT requirements. We find that REOCs are willing to pay a premium above the market valuation to acquire desired portfolios. Moreover, we document that the REIT status enhances equity inflows, driving increased M&A transaction activities and deal volume. While converted REITs outperform their peers over the long run, we find that a lower (higher) level of restructuring activity is associated with even higher (risk-adjusted) performance.

ABSTRACT The economic well-being of a household depends on its access to credit and also its access to a legal system for managing over-indebtedness. Our hypothesis is that the removal of regulatory constraints on a bank’s ability to expand in new geographic markets increases households’ access to credit, which in turn, contributes to a rise in consumer defaults. In the US, we find a net increase in Chapter 13 bankruptcies following a loosening of a state’s restrictions on multi-branch banking, compared to the increase in Chapter 13 bankruptcies in states that did not change their banking rules. The increased mortgage lending after branch deregulation helps explain this rise in Chapter 13 filings, suggesting that homeowners use the Chapter 13 code to save their houses. Further, the effects of the mortgage supply channel are greater in areas with low bank concentration. Overall, our findings are relevant to policymakers in their efforts to either set up a new personal insolvency regime or modify the existing bankruptcy process.

This study examines the asset-stock liquidity relationship for firms with location-specific assets. Using a sample of real estate investment trusts (REITs), we extend the concept of asset liquidity to include information based on local property market turnover. Our findings confirm that holding more cash increases REIT stock liquidity. More importantly, we find a positive relation between property market liquidity and REIT stock liquidity. This relation is stronger for REITs with lower growth opportunities, less information advantage, and greater financial constraints. Our findings also provide evidence that managers can actively influence stock liquidity through asset structure.

This paper examines the performance of real estate firms that issue seasoned equity with the stated purpose of investing in private market assets. Prior literature documents that (i) firms, in general, underperform following a season equity offering and (ii) growth firms underperform value firms. We propose a stylized model where firms may arbitrage a public market premium relative to the private market by investing seasoned equity proceeds in the latter market. We hypothesize and test this "public versus private market arbitrage" hypothesis for an international sample of 531 listed property companies spanning 12 countries. Consistent with the predictions of our model, we find that growth firms, those with relatively higher public market values, outperform value firms only under the condition where the stated use of proceeds is for investment purposes as opposed to all other uses, i.e., not investment-related. Our empirical evidence is based on buy-and-hold abnormal returns, time-series portfolio regressions, and firm-level, cross-sectional analysis. Overall, our results are consistent with a value-added strategy of public versus private market arbitrage and highlight the key consideration in the related capital allocation decision.

This paper provides new evidence on the effect of housing wealth on consumption by focusing on the impact of home-equity extraction. We develop a household consumption decision model to illustrate the differential effect of home-equity extraction, relative to net home equity, on consumption. The home-equity extraction channel is also shown to vary with household-level borrowing constraints. Based on U.S. household survey data and an instrumental-variables approach, our empirical results validate model predictions. We find that the marginal propensity to consume is two times higher for the home-equity extraction channel relative to the conventional housing wealth effect. The consumption effect of home-equity extraction is more than 2.5 times greater for liquidity-constrained households than for unconstrained households. These results are even more pronounced in the case of durable goods consumption for constrained borrowers.

This paper examines the impact of underlying property market liquidity on the liquidity of publicly traded REIT shares. Our analysis measures firm-level exposure to local, direct real estate market liquidity using the property allocation of each REIT. The findings show that property market liquidity can causally influence the liquidity of real estate securities. This is especially true during the crisis period, which confirms with the notion that illiquidity is transmitted from direct to indirect property markets. The results also reveal that the liquidity of a firm’s assets can affect the liquidity of financial claims on the assets. The corporate investment decision, including the selection of a geographic market, can affect stock liquidity. Furthermore, we find that the sensitivity to underlying asset liquidity changes with the firm’s credit constraint and investment opportunities. Small REITs, REITs with a lower cash interest coverage ratio, and REITs with a higher book-to-market ratio might choose to invest in more liquid property markets to improve their stock liquidity. Finally, we find that underlying asset liquidity is associated with REIT values.

Real Estate Investment Trusts (REITs) are well-known institutions since their establishment back in the 1960s at least in the United States. Since the midst of 1990s, the regime spread across the globe. Although their regulatory elaborations differ across countries, the formal requirements remain almost similar. So why is it, REITs became a success story in only some parts of the world? Economic theory postulates several reasons for achieving the tax-exempt status. However, there are practical up- and downsides of course. This paper classifies the severity of regulations, incorporates agency issues and reveals driving forces of listed real estate companies, which influence the decision to opting the REIT status. Thus, balance sheet data as well as legal formalities and specific environments of each corresponding country are incorporated. In academic literature, there are numerous papers tackling REITs in various aspects. Nevertheless, scant is examined about incentives, which affect the decision of stationary firms to convert. Since REITs are quite homogenous and transparent, this entity type is predestinated to serve in a global comparison. Therefore, listed property companies quoted on each domestic market, in which the REIT regime is already established, and listed at the EPRA/NAREIT global real estate index, were observed over the years from 1998 to 2017. To conclude significant influence a panel logistic regression model figures out key characteristics for a higher probability of adopting the REIT status. The overall results suggest a strong causal effect on the capital structure in the subsequent post intervention periods, while elements like size, leverage, discounts of adopting and tax benefits seem to matter most at considering for conversion in the transnational context.

Conventional wisdom suggests that shareholder activism in REITs is less prevalent than in other (non-REIT) public firms because of stronger barriers to hostile takeovers and potentially less undervaluation. Our results, however, suggest that the conventional wisdom does not hold. Specifically, we find that in 2006-2015, Equity REITs (EREITs) are as likely to be targeted by shareholder activists as non-EREITs. We also find that shareholder campaign characteristics and determinants, as well as their value consequences, appear similar for EREITs and non-EREITs. Given that this is the first study to examine shareholder activism in REITs, we raise several questions for future research.

This paper examines the impact of the ratio of price-to-fundamental value on the stock market performance of real estate securities following seasoned equity offerings and senior debt issuances. Using a global sample of real estate securities, we distinguish between growth stocks, i.e. those with the highest stock prices relative to the private market value of their properties, and value stocks, which tend to trade at substantial discounts to their net asset value (NAV). Consistent with the notion that newly issued equity is ultimately priced similar to pre-SEO levels, we find that growth stocks perform significantly better than value stocks in the 36 months following the SOE. We also examine the long run performance following senior debt issuances and document a substantial outperformance (underperformance) for growth (value) real estate securities in the 36 months following the offering. Overall, our findings are consistent with the hypothesis that growth REITs can benefit from "public vs. private market arbitrage".

This article examines the trade-offs in launching new real estate funds, specifically open-end, direct-property funds. This investment vehicle, which is designed to provide the risk-return benefits of private market real estate, is available to retail investors in a number of countries. At the same time, these funds are also subject to liquidity risk, because they hold an inherently illiquid asset in an open-end structure. This format presents fund-family managers with unique challenges, particularly with the decision to open new funds. The data consist of 2,127 German fund openings across 76 fund families in 12 asset classes over the 1992-2010 period. Including a wide range of asset classes allows for a comparison between real estate and other investment objectives. We find a substantial cannibalization effect across the existing real estate funds of a family, while we note the opposite effecti.e., flows into existing funds increase following a fund opening within the same objectivefor all other asset classes. Our analysis of fund opening determinants shows that inflows mitigate the cannibalization risk for new real estate funds. Additional evidence highlights the role of scale and scope economies in real estate fund openings. Overall, the results provide new insights into the relatively large size and small number of real estate funds when compared to mutual funds dedicated to other investment objectives.

In this article, the authors explore whether properties with higher cap rates have better investment performance than those with low cap rates. Using market-adjusted cap rates to classify individual properties, they find evidence of a strong value effect in real estate: High-cap-rate properties exhibit higher returns, outperform on a risk-adjusted basis, and should be preferred by investors. The value effect is consistent across property types, persistent over the cycle, statistically significant, and very large in economic terms. Although the underlying dynamics vary somewhat across property types (especially apartments), the better performance of high-cap-rate (i.e., value) properties appears nearly ubiquitous. TOPICS:Real estate, performance measurement

This paper examines the wealth maximisation and preservation effects of including commercial real estate in retirement-phase portfolio management. Prior research addresses the role of real estate during the wealth-accumulation phase of the investor lifecycle; however, little is known about the contribution of real estate during the invest-and-spend, or decumulation, phase. To address this issue, we estimate short-fall risk based on the widely known 4% Rule. We use pricing data for multiple asset classes and simulation techniques, combined with a robust correlation structure, to examine: short-fall risk sensitivity to alternative spending rules; the impact of public vs. private real estate allocations; wealth preservation as an investment objective; and the effect of real estate on upside, or wealth maximisation, potential. We find short-fall risk in a decumulation portfolio decreases with substantial allocations to real estate. This result holds for a portfolio including either public or private real estate. Additionally, and under most conditions, the best performing decumulation-phase portfolios include a real estate allocation with both public and private real estate exposure. These results have significant implications for investors, whether they be retirees, plan administrators or endowments, as well as financial economists studying the lifecycle of investment decisions.

Convexity in the flow-performance relationship of traditional asset class mutual funds is widely documented, however it cannot be assumed to hold for alternative asset classes. This paper addresses this shortcoming in the literature by examining the flow-performance relationship for real estate funds, specifically open-end, direct-property funds. This investment vehicle is designed to provide the risk-return benefits of private market real estate and is available to retail investors in many countries across the globe. An understanding of fund flow dynamics associated with this investment vehicle is of particular interest due to the liquidity risk associated with holding an inherently illiquid asset in an open-end structure. Our analysis draws on the theoretical foundations provided in the literature on mutual fund flows, performance chasing, liquidity risk, participation costs and dynamics across market cycles. We focus on German real estate funds from 1990 to 2010 as this is the largest market globally and there is a high level of confidence in the data. The results show that real estate fund investors chase past performance at the aggregate level and the relationship between flows and relative performance is asymmetric (i.e., convex) at the individual fund level. Fund-level liquidity risk tends to weaken convexity, while sensitivity increases with higher participation costs. We find the flow-performance relationship varies across time, though our interpretation is asset and investment vehicle specific. The implications are applicable to investors and fund managers of open-end, direct-property funds and, more broadly, other alternative asset funds where the underlying asset may not be liquid.

This paper investigates the two types of housing wealth effects: the “pure” wealth effect, and the collateral effect. We incorporate mortgage equity withdrawals (MEW) and the influence of mortgage liberalization into the Campbell and Mankiw (1989) model. Based on U.S. data during the 1978Q1-2012Q3 period, our empirical results suggest that the collateral effect adds to housing marginal propensity to consume (MPC), not “in addition to” but “instead of” the “pure” housing wealth effect. Furthermore, mortgage liberalization significantly amplifies the collateral effect. Conditional on the use of MEW and the share of the non-GSEs market-based financial intermediaries’ mortgage holdings to total home mortgage, housing wealth has an average MPC of 1.78 cents, a maximum of 6.07 cents. With the relaxed access to mortgage credit, by 2007, the MEW shock explained close to 40% of the forecasting variance of consumption growth.

Divergences between public and private market valuations provide potential arbitrage opportunities. We develop a model in which the investment decisions of public companies depend on the valuation gap between public and private markets. Our model predicts that public companies finance growth externally by raising capital, debt and equity, when public market valuations exceed private market valuations in order to realize shareholder value gains. We empirically test our model’s predictions using a global sample of 400 REITs and REOCs. We argue that the real estate industry is particularly well suited for this analysis due to its transparency, as well as the high number of private market valuations in general, and at the company level. In particular we examine: 1) whether public real estate companies exploit valuation gaps between public and private markets through external growth (i.e., by raising equity and debt to expand their portfolios), and 2) whether these externally financed expansions result in shareholder value gains.