Academic Sees Pricing Efficiency in REITs, REIT Indexes

Bob Connolly, finance professor at the University of North Carolina at Chapel Hill, joined REIT.com for a video interview during REITWeek 2015: NAREIT’s Investor Forum, held in New York.

Connolly presented research at the NAREIT/ American Real Estate and Urban Economics Association (AREUEA) Real Estate Research Conference, which was held the day before the start of REITWeek.

Connolly addressed the question of whether investors in REIT index products can assume efficient market pricing.

“Indexes are very efficiently priced,” Connolly said.  He also said he sees similar evidence for individual REITs: “It looks very much like the average REIT works extraordinarily well in this respect.”

Although there are scattered instances where “efficiency isn’t all we’d look for from a theoretical perspective… the market seems to fix itself,” Connolly noted. He explained that a REIT that has a tough quarter in terms of the price discovery process tends to bounce back very rapidly.

“From an investor’s perspective, I think they can take it as an article of faith that just about every REIT is going to be efficiently priced every single period,” he added.

Connolly also discussed factors that contribute to pricing efficiency.

“What we have discovered is that not only do institutional owners play a big role, but it’s the long-term, slow traders that actually are the most crucial for understanding the efficiency process,” Connolly said. He emphasized that “the buy-and-hold folks” are more important than high-volume institutional traders. “That was a remarkable finding,” Connolly noted.

Other factors that contribute to pricing efficiency include REITs that have traded options and REITs with lower trading costs, he added.

Meanwhile, Connolly touched on the relationship between pricing efficiency and REITs that trade either at premiums or discounts to their net asset value (NAV).

“The difference between price and NAV is a unique part of the REIT market,” he said. “Inefficiency and mispricing aren’t exactly the same thing, but every time you see big mispricing, you can predict big inefficiencies in the subsequent quarter. By contrast, if you see inefficiency that’s very large, it doesn’t mean that you are going to have mispricing.”