From the Research Desk

11/6/2012 | By Brad Case

Published in the September/October 2012 issue of REIT magazine.

(Some) Institutional Investors Make REITs Operate More Efficiently

SOURCE: “Institutional Investors and Firm Efficiency of Real Estate Investment Trusts,” published in Journal of Real Estate Finance and Economics, July 2012.

AUTHORS: Richard Chung (Hong Kong Polytechnic), Scott Fung and Szu-Yin Kathy Hung (Cal State Hayward)

Synopsis: A trio of economists investigated whether institutional investors may play a role in making REITs operate more efficiently. They found that certain institutional stockholders improve efficiency through better governance, while others may make it worse.

Overall, our findings convey a clear message: institutional ownership can reduce firm inefficiency, and the effect is stronger for active, top-five, and long-term institutional investors. These institutional investors have strong incentives to improve corporate governance due to their higher equity stakes or their longer investment horizon.  Specifically, we report that institutional investors can improve inefficiency more effectively for the sub-samples of distressed REITs, and of REITs with higher degree of information asymmetry.

Meanwhile, short-term institutional investors have no impact on firm inefficiency, implying that short-term investors are myopic and probably have no incentive to monitor firm governance. Hedge funds and pension funds aggravate the inefficiency problem.”

REITs Provide a “Safe Haven” During Liquidity Crises

SOURCE: “Bank Failures and REIT Returns,” published in Journal of Real Estate Portfolio Management, January-April 2012.

AUTHORS: Glenn R. Mueller (University of Denver) And German economists Malte H. Raudszus and
Jan-William Olliges

SYNOPSIS: Three economists researched the performance of REIT stock prices immediately following bank failures, when investors may seek “safe havens” from market uncertainty.  They found that REIT returns were abnormally positive following liquidity crises caused by bank failures.

Bank failures could create a relatively positive valuation effect for REITs because investors commonly interpret real estate as a safe haven during an economic crisis.  Especially during a great financial crisis that causes strong market uncertainty, REITs may follow less short-term common equity behavior and move more in line with direct real estate valuations.

The empirical results show that REITs generally experience positive abnormal returns (averaging 0.93 percent) around bank failure dates while systematic risk levels (beta) remain highly stable.  This result supports the safe haven theory and indicates that REITs presumably react more like real estate than like common equities during financial crises.

Green Buildings Command Higher Rents

SOURCE: “Sustainable Building Certification and the Rent Premium: A Panel Data Approach,” published in Journal of Real Estate Research, January-March 2012.

AUTHORS: Alexander Reichardt (EBS University in Germany), Franz Fuerst (Cambridge University), Nico B. Rottke (EBS University in Germany) and Joachim Zietz (Middle Tennessee State University)

SYNOPSIS: An international team of economists compared rents of properties with Energy Star or LEED certifications with non-certified properties to determine whether sustainable or “green” certification produces a rent premium. They found significantly higher rents commanded by green-certified properties.

“The results of the empirical analysis confirm the expectation of a rent premium.  The fixed-effects models suggest that an Energy Star label increases rents by 2.5 percent and a LEED certification by 2.9 percent, averaged over all time periods in the analysis.  Controlling for confounding factors, this premium is shown to have increased steadily from 2006 to 2008.  The results also show a significant positive relationship between Energy Star labeling and building occupancy rates.”




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