Mühlhofer, Tobias
(2005)
Trading constraints and the investment value of real estate investment trusts: an empirical examination.
PhD thesis, London School of Economics and Political Science.
Abstract
This study focuses on the property-derived cash
flows that a REIT investor earns.
We observe that, in the short run, REIT investors are only exposed to the income
cash
flows of a REIT's underlying portfolio and not to its property price
fluctuations.
Specifically, investors miss out on the component of appreciation returns not contained
in income.
Chapter 3 observes this phenomenon and argues, without proof, that this is due
to the trading restrictions that REITs face in order to operate tax free, which impose
minimum holding periods on properties in REITs' portfolios. Chapters 4 and 5 show
that the trading-restrictions explanation is indeed the reason for this phenomenon.
Specifically, chapter 4 tests how REITs with different firm characteristics are differently
affected by the trading constraints. Firstly, we test for size effects and find that
medium-sized and large firms offer investors better exposure to short-term
fluctuations
in property appreciation than small firms. This supports the trading restrictions hypothesis,
as large firms are less affected by these. Secondly, we test for the effects of the
degree of diversification in a REIT's portfolio and find that, while investing in a REIT
which is diversified by property type gives an investor better exposure to appreciation
cash
flows, investing in one whose portfolio is merely geographically diversified does
not. Finally, we test whether UPREITs give an investor better exposure to property
appreciation cash
flows and find strongly that this is so. Since the partnership that
holds the property in an UPREIT is not subject to selling constraints, we find our
hypothesis strongly supported.
Chapter 5 analyzes holding periods and selling decisions. We firstly simulate a
possible filter-based market timing strategy which significantly outperforms a simple
buy-and-hold strategy, and demonstrate to what extent holding periods shorter than
what is allowed are required. We then analyze actual holding periods of properties in
REITs' portfolios and model the decision to hold a property beyond four years, finding
strong evidence that there is an incentive to do so in a rising market. This gives strong
support to the trading-restrictions explanation.
Actions (login required)
 |
Record administration - authorised staff only |
Download statistics
Download statistics