From the Research Desk

2/22/2013 | By Brad Case

Published in the January/February 2013 issue of REIT magazine.

Finding Similarities in Public and Private Real Estate

Source: “Private and Public Real Estate: What Is the Link?” published in Journal of Alternative Investments, Winter 2012.

Authors: Dan Stefek and Raghu Suryanarayanan of MSCI

Synopsis: The pair investigated the relationship between returns on public and private real estate investments, and found that the two forms of real estate investment provide very similar return and risk patterns, especially over the longer investment horizons typical for institutional real estate investors. NAREIT staff have conducted very similar research and found qualitatively identical results, which are updated on a monthly basis.

“Private and public investments … provide exposure to the same property market, yet by conventional measures public and private investments offer surprisingly different return and risk profiles. The link between public and private real estate is obscured by the way private real estate returns are measured. Appraisal-based indices suffer from two well-known problems: they lag the market and they understate volatility. As a result, property index returns do not accurately capture true private real estate returns.

We demonstrate a strong link between the returns to public and private real estate by correcting for appraisal smoothing and for the lead-lag relationship between public and private returns. Moreover, the correlation between private and public returns strengthens as the investment horizon increases: the correlation between public and private returns grows rapidly at first as the horizon is extended, and then levels off to about 0.75 at the investment horizon of two years and beyond.”

Strong Credit Lines Increased REIT Liquidity, Even During the Liquidity Crisis

Source: “Evolution of Corporate Line of Credit Access and Use: Evidence from REITs,” published in Research Issues in Real Estate: Essays in Honor of James R. Webb, 2011.

Authors: Michael Highfield of Mississippi State University, Matthew Hill of the University of Mississippi, and Ko Wang of Baruch College

Synopsis: Three economists researched REIT credit lines over the period 1999 to 2009and found that REITs maintained precautionary liquidity by increasing access to, but not use of, lines of credit.

“Lines of credit provided by banks serve as liquidity insurance for firms in case of future adverse cash flow shocks. Further, credit lines can facilitate short-term investment until capital can be raised through longer-term sources such as bond and equity markets. By providing optional liquidity that serves as a substitute for cash, the credit lines reduce the opportunity and agency costs associated with corporate cash holdings.

The capital constraints faced by REITs make credit lines a vital source of financing for property acquisition. We find that REITs have substantially increased their liquidity via available lines over the period 1999 to 2009. Total lines available could support 17 percent of REIT net assets, whiles REITs retain substantial overall liquidity by using less than 40 percent of availability, even at the peak of the financial crisis in 2009.  The results show that while available lines have increased substantially over the time period studied, relative use has declined. Implications of this trend are an overall improvement in industry liquidity for the period, increased monitoring by bank lenders, and a possible reduction in industry-related agency costs.”



Other Features

REIT Research Desk
Reading Into It SOURCE : “Do Investors Infer Vocal Cues from CEOs During Quarterly REIT Conference Calls?” working paper, Feb. 19, 2016. AUTHORS : S...
The Latest REIT Research
SOURCE : “Averages Tell You Little: The Effects of Multifamily Construction on Rents,” Journal of Portfolio Management, Special Real Estate Issue,...
From the Research Desk
Volatility No Higher for Listed Equity REITs than for Private Real Estate SOURCE: “Estimating Private Equity Returns from Limited Partner Cash Flows...
From the Research Desk
SOURCE: “Agency Cost, Dividend Policy and Growth: The Special Case of REITs,” Journal of Real Estate Finance and Economics, March 2013 AUTHORS:...
From the Research Desk
How Public Information Impacts REIT Share Prices SOURCE: “Public Information, REIT Responses, Size, Leverage, and Focus”, Journal of Real Estate...
From the Research Desk
SOURCE 1: “Commercial Real Estate Returns: An Anatomy of Smoothing in Asset and Index Returns” forthcoming in Real Estate Economics. AUTHORS: Shaun A...
From the Research Desk
Listed REIT Capital Market Access PROVIDES a Competitive Advantage over Private Real Estate Entities SOURCE: “Do REITs Have an Advantage When Credit...
From the Research Desk
Higher REIT Growth Rates with Greater Transparency SOURCE: “Corporate Transparency and Firm Growth: Evidence from Real Estate Investment Trusts,”...
From the Research Desk
REITS AND DIRECT REAL ESTATE ARE PERFECT LONG-RUN SUBSTITUTES SOURCE: “The Long-Run Dynamics between Direct and Securitized Real Estate,” published...
From the Research Desk
(Some) Institutional Investors Make REITs Operate More Efficiently SOURCE: “Institutional Investors and Firm Efficiency of Real Estate Investment...