50 years of reits

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REVIEW ARTICLESEditor

David M. HarrisonTexas Tech University

Rawls College of BusinessBox 42101

Lubbock, TX 79409-2101

806-742-3190 (Phone)[email protected]

This section of the Journal of Real Estate Literature publishes quality review articlesand makes a substantive contribution to the real estate literature by providing articlesthat summarize, review and synthesize the leading areas of research in real estate. TheJournal of Real Estate Literature is the first publication devoted to comprehensiveassessments of topics important to current and future areas of real estate research andscholarship. If you have any ideas for a review manuscript or if you have an outlinefor a possible review article, contact David M. Harrison.

Associate EditorsJim Clayton (20122016)Cornerstone Real Estate AdvisorsMarsha J. Courchane (20122014)Charles River AssociatesBartley R. Danielsen (20122013)North Carolina State UniversityLynn M. Fisher (20122013)University of North CarolinaKaren M. Gibler (20122013)Georgia State UniversityMichael J. Highfield (20122013)Mississippi State UniversityMichael LaCour-Little (20122016)California State UniversityFullertonDavid C. Ling (20122015)University of FloridaCliff Lipscomb (20122017)Greenfield Advisors

Joseph Ooi (20122014)National University of SingaporeJames D. Shilling (20122015)DePaul UniversityRobert A. Simons (20122014)Cleveland State UniversityC.F. Sirmans (20122015)Florida State UniversityG. Stacy Sirmans (20122015)Florida State UniversityV. Carlos Slawson (20122014)Louisiana State UniversityBrent C. Smith (20122013)Virginia Commonwealth UniversityElaine Worzala (20122014)Clemson UniversityAbdullah Yavas (20122015)University of Wisconsin

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50 YEARS OF REAL ESTATE INVESTMENTTRUSTS: AN INTERNATIONAL EXAMINATION OFTHE RISE AND PERFORMANCE OF REITS

Dirk BrounenTilburg University

Sjoerd de KoningBoston Consulting Group

AbstractIn 1960, the U.S. Congress passed the Real Estate Investment Trust (REIT) Act toexpand the investment universe beyond securities such as stocks and bonds. The REITstandard has been adopted in 34 countries. In this paper, we examine the evolutionand performance of this international REIT market. As REIT markets mature, we findthat standard asset pricing models become better suited to explain the stock pricemovements of REITs. Our results show that over the past decade REIT stockoutperformance was highest in Europe, and related positively to firm size, the levelof property type specialization, and geographic portfolio focus. Systematic REIT riskis highest among Asian REITs and is mainly a reflection of firm leverage, especiallyin recent years.

The year 2010 is likely to go into the economic history books as a year in whichfragile signs of economic recovery and great uncertainty among investors triggered anew wave of financial regulations, like Basel III and Solvency II. Setting stricterstandards that are designed to enhance market transparency and reduce the risks takenby market actors are regaining popularity. The year 2010, however, was also the 50year anniversary of the Real Estate Investment Trust (REIT) Act of 1960, a financialtax regulation that fueled the development of the public real estate market. Like manyof the current regulations, this REIT standard was designed to reduce investment risksand to amplify the transparency of this investment industry. But this 50 year REITanniversary passed almost without notice or celebration. This is unfortunate, since theREIT industry has matured, both in size, volume, and experience. Hence, we take thisopportunity to look back at these five decades of REIT history, and analyze thefinancial performance of the asset class from an international perspective.

The U.S. REIT owes its existence to the Real Estate Investment Trust Act of 1960,which came about following intense lobbying from investment banks and was passedas an unrelated side piece to a larger change in tax legislation (Graff, 2001). The tax-exempt status of REITs was supposed to suit investors as a structure that would allowthem to invest in large, diversified portfolios of real estate combined with the liquidityof the public market. However, the severe restrictions REITs faced in the operationsof their real estate portfolios prevented them from growing into a major industry. TheTax Reform Act of 1986 loosened these restrictions and formed the basis of the REITboom in the 1990s that would place the REIT industry in a lead role as real estate

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kgaydinSticky NoteREIT'lerdeki varlk fiyatlarndaki deiimleri standart hisse deerleme modelleri daha iyi aklyor. REIT hisse deerleri avrupada en yksek. irket bykl, uzmanlama tpimdeki varlk dzeyi ve corafik portfolyo odayla balantl olarak fiyat deiiyor. asyada riski ok yksek,

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kgaydinSticky NoteEU Directive that codifies and harmonises the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.

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kgaydinSticky Noteyatrm risklerini azaltmak ve yatrm piyasalarnda effafl gelitirmek iin gelitirilmi bir ara.

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kgaydinSticky Noteyatrm bankalarnn lobicilik faaliyetleri sonras 1960 da yasa karld, ve vergi kanunlarndaki deiikliin bir paras olarak bu gerekletirildi. vergiden muaf yatrm arac olmasyla piyasaya likidite salamas ve eitlendiirlmi portfolyolara yatrm yapmay salamas amaland. yine de faaliyet aamasnda baz snrlamalarla karlayordu. 1986 da bu snrlamalarn kalkmasyla piyasada bvir patlama yaanarak piyasada nc rol oynamaya balad.

198 JOURNAL OF REAL ESTATE LITERATURE

VOLUME 20, NUMBER 2, 2012

developed into the third most important asset class next to stocks and bonds. Duringthe past decade, REITs have steadily grown in size and importance around the worldand today the value of the listed real estate investment universe is more than $1trillion.

Despite the rich history and significant investor interest that REITs enjoy, the sectoris much less understood than other equity sectors. Fundamentally, academics andinvestors have questioned whether they should view REITs simply as listed vehiclesthat provide access to returns from their underlying property portfolio, or whetherREITs are an integral part of the broader capital markets and their performance shouldbe judged from the perspective of an equity market index. Studies examining thismatter have produced mixed results, although it has become evident that REIT returnsare not just a simple reflection of the income return and capital appreciation of theirproperties.

In this paper, we offer a comprehensive overview of the history of the REIT vehiclewithin different parts of the world. Apart from looking back at important landmarksin REIT history, we discuss the current size and composition of the international REITmarket. We conclude the paper by analyzing the cross-section of returns of 204different REITs from Australia, Hong Kong, Japan, Singapore, France, TheNetherlands, United Kingdom, Canada, and the United States for the two most recentdecades. Our paper seeks answers for various questions, among which: What triggeredthe evolution of todays REIT industry? And what drives the stock performance ofinternational REITs?

Our review of REIT history shows the importance of setting the right conditions andrequirements in developing a sizeable REIT industry. Both in the U.S. and beyond,lobbying organizations and coinciding financial deregulations have been key to thesurge of the REIT markets. The correct alignment of interests between the governingauthorities and the investment communities is a challenging task. When consideringthe two most recent decades of REIT stock performance for the nine largest REITmarkets in the world, we find that REITs have offered a modest outperformance,combined with a moderate systematic risk profile. When analyzing the cross-sectionof REIT alpha, as a proxy for stock outperformance, and beta, as a measure of risk,we find that REITs exhibit more systematic risk in Asian markets and that riskincreases with financial leverage. Regarding the stock outperformance of the pastdecade, we find that alpha has been highest in Europe, and related positively to firmsize, the level of property type specialization, and geographic portfolio focus.

THE REIT EVOLUTION

Real estate investment trusts have come about following an attempt by the U.S.Congress to expand the universe of investment instruments beyond securities such asstocks and bonds (Graff, 2001). The Real Estate Investment Trust Act of 1960 wasadopted after pressure from Wall Street investment banks that were looking for new,profitable investment products to satisfy investor appetite during one of the greatestbull markets in U.S. history (Graff, 2001). Interestingly, the Act was not passed as a

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kgaydinSticky Notehisse ve tahvilden sonra nc nemli varlk haine geldi gayrimenkuller. 1 trilyon dolardan byk

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kgaydinSticky Notedaha iyi performans sergileme

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kgaydinSticky Noteirketlerin borluluk orannn artmasyla birlikte risk artyor, daha ok asya piyasalarnda.

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50 YEARS OF REAL ESTATE INVESTMENT TRUSTS 199

stand-alone bill, but rather as a rider attached to an unrelated piece of tax legislation.As such, the U.S. REIT industry owes its existence to the maneuverings of legislatorsand lobbyists, rather than to a well-thought piece of the U.S. legislation.

REITs provide investors with a liquid way of investing in diversified portfolios ofcommercial real estate. The tax-exempt status that REITs enjoy made it an attractivelegal structure for real estate companies, although the listed entities do experience anumber of restrictions in their operations and policies. These restrictions have beeneased in a step-by-step process of modernization that often triggered a boom in thepopularity of the REIT structure. Still today, the requirement to distribute the earningsfrom rental income as dividends restrict U.S. REITs in their ability to grow organicallythrough internally built up cash reserves.

THE EARLY YEARS

Decker (1998) and Graff (2001) note that REITs did enjoy a period of modestpopularity during the 1960s, but failed to grow into a major source of real estatecapital. Misuse of debt financing by a number of REIT managers led to dissolutionsof REITs and investor appetite quickly faded during the 1970s bear markets (Graff,2001). At the time, the REITs that managed to continue operating exhibited morecharacteristics of small-capitalization stocks rather than of private real estate (Gyourkoand Keim, 1992) and (Han and Liang, 1995). In the first two decades of its existence,REITs failed to deliver real estate returns combined with stock market liquidity.

An additional reason for the slow growth of the REIT industry in its maiden yearswas the restriction to only passive real estate investments, which prohibited REITsfrom managing their own properties. This prevented REITs from evolving intointegrated operating companies, and created agency conflicts between REIT managersand outside property managers. In 1986, the REIT lobby championed by the NationalAssociation of Real Estate Investment Trusts (NAREIT) spotted an opportunity as theU.S. Congress was preparing new legislation on real estate taxation in what wouldbecome the Tax Reform Act of 1986. A number of REIT-related amendmentspackaged as the Real Estate Investment Trust Modernization Act was adopted. Thislegislation gave REITs the ability to manage their own properties. As King (1998)notes, this provision was regarded as the most important change in the REIT taxregime that has permitted the explosive growth of the REIT industry in the 1990s andto REITs becoming real operating companies. Nevertheless, it would take a few yearsafter the 1986 legislation before the REIT industry would really experience explosivegrowth. By the end of 1990, there were still only 58 publicly traded equity REITs,with a combined market capitalization of $5.6 billion (Graff, 2001).

THE 1990s REIT EXPLOSION

Following a period of overbuilding during the late 1980s, many real estate developerswere left with highly leveraged properties that could not be refinanced. A surge inmortgage defaults triggered by the collapse in real estate prices in the early 1990sfurther added pressure on real estate companies to seek new sources of capital to

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kgaydinSticky Noteiyice dnlm bir ara olmaktan ok yatrm bankalarnn lobicilik faaliyetleri ile gelitirilen ve vergi kanunu ats altnda ortaya atlan bir ara

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kgaydinSticky Notekira gelirlerinden elde edilen kazanlar temett olarak datma zorunluluundan dolay, ABD REITlerinin organik olarak byme ve nakit rezervlerini iten artrma imkan snrlyd.

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kgaydinSticky Note1970lerde ay piyasasnda REIT yneticilerince bor finansmannn yanli kullanm yatrmcnn gvenini zedeledi.

bu dnemdeki yap da kk sermaye kapitalizasyonuna sahip hisselerdi, zel gayrimenkuller deildi. ilk 20 ylda gayrimenkul gelirlerini pay piyasas likiditesiyle harmanlamay baaramad.

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kgaydinSticky Notesmall-cap stocks: One of the biggest advantages of investing in small-cap stocks is the opportunity to beat institutional investors. Because mutual funds have restrictions that limit them from buying large portions of any one issuer's outstanding shares, some mutual funds would not be able to give the small cap a meaningful position in the fund. To overcome these limitations, the fund would usually have to file with the SEC, which means tipping its hand and inflating the previously attractive price.

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kgaydinSticky Notekstlama: yalnzca pasif gayrimenkul yatrmna izin vard, kendi varlklarn ynetmesine izin yoktu. bu da reitlerin btnleik irketler olmasn engelleyerek reit yneticileriyle dardaki varlk yneticileri arasnda bir kar atmas yaratt.

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kgaydinSticky Note1990 larda yksek borla finansa edilen varlklar yenden finanse edilemedi ve mortgage lardaki temerrt ile gayrimenklul fiyatlar dnce, RET ler kendi bilanolarn glendirmek iin yeni sermaye arayna girdi.



strengthen their balance sheets. Additionally, tougher risk-based criteria for insurancecompanies in 1993 classified most commercial mortgages as higher-risk fixed-incomeinvestments for reserve requirement purposes, a development that made real estatedebt an unattractive investment for insurance companies. As a result, private real estatecompanies faced the inability to refinance their debt, and in the meanwhile needed toavoid any asset liquidations in the light of depressed real estate prices. As analternative, these companies were forced to consider cheap equity capital infusion, asREIT valuations surprisingly surged in 1991 despite the collapse of real estate prices.

Triggered by the $128 million Kimco initial public offering (IPO) in November 1990and the $330 million Taubman IPO a year later, many large real estate companieschose to convert to a REIT structure. Low interest rates and bond yields created awindow of opportunity for real estate companies to enter the public equity marketsand equip themselves with additional capital to take advantage of the depressed realestate prices. In the 19931994 IPO boom, 95 private U.S. real estate companieswent public as REITs, raising $16.5 billion in equity.As the REIT industry finally developed into an industry of significant size, a secondmajor development was needed to ensure that capital markets would be willing andable to continue to facilitate the expansion of REIT equity offerings. In 1974, thepension fund sector experienced a major change with the enactment of the EmployeeRetirement Income Security Act (ERISA). The Act put pressure on pension planmanagers to diversify their holdings in accordance with Modern Portfolio Theory(MPT), up to the point of personal liability for lack of diversification in the case ofunderperformance. In order to weaken legal restraints on investments in REITs bypension plans, an attachment to the Omnibus Budget Reconciliation Act (OBRA) of1993 created a distinction in shareholder recognition to circumvent shareholderdiversification requirements in the REIT legislation. In the following four years,pension plan investments in REITs would still remain modest, but other institutionalinvestors like mutual funds and insurance companies massively turned to REITs as areal estate investment, thereby securing investor demand for the REIT equity capitalboom between 1993 and 1997 (Parsons, 1998).Despite the promise from real estate managers that large capitalizations would enableREITs to reflect the investment characteristics of underlying properties and createscale advantages and liquidity, 1998 proved to be a disastrous year for the U.S. REITindustry. With no apparent change in the valuation of the underlying properties,suddenly the premiums to net asset value (NAV) disappeared throughout the REITindustry. The NAREIT index lost 22% in that year and ended 1999 at an overalldiscount to NAV of 18%. Investor concerns about the market fundamentals of theproperties caused them to be more hesitant to accept the continuous equity offeringfrom REITs. Apart from that, the decline of the REIT industry coincided with thebuild-up of the dotcom bubble. It is widely believed that momentum investors whopulled their money from the real estate sector did so to invest in the upcomingtechnology stocks in their belief that this would create higher returns. The suddenunderstanding that broader capital market trends could influence the performance ofREITs emphasized a fundamental question about listed real estate: Are real estate

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kgaydinSticky Note1993 ylnda sigorta irketleri iin daha ar risk bazl kriterler mevcuttu. birok mortgage n yksek riskli yatrmlar arasna alnmas bunlarn sigorta irketlerince yatrm arac olarak kullanlmasn engellemitir. bu yzden bu irketler borlarn finanse edecek kaynak bulmakta zorlanyorlard. 1991deki gayrimenkul fiyatlarnn dmesi ile, bu yzden alternatif olarak ucuz hisseden elde edilen sermaye desteiyle finanse etmeye altlar.

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kgaydinSticky Notedk faiz oranlar ve tahvil kazanlarnn yaratt frsat penceresinde, pay piyasalarna giri yapt ve gayrimenkul fiyatlarndaki depresyona ramen ek sermayeden faydaland.

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kgaydinSticky Notezsermaye

kgaydinSticky Notereit piyasas belirli bir bykle ulatktan sonra reit hisselerinin halka arz iin ikinci bir adm atlmas gerekiyordu. 1974 de emeklilik fonu sektrnde byk bir deiiklik oldu ve emeklilik fonu yneticilerinin portfolyolarn eitlendirmeleri ynnde bir bask geldi. reitlere yatrm yaplmasna ynelik yasal kstlamalar azaltmak iin emeklilik planlaryla, 1993 ylnda reit yasalarnda hissedarlarn tannmas ile hissedarlktan k farkllatrmas gereklilii getirildi. takip eden drt ylda emeklilik planlar yatrmlar lml seyir izlese de, dier kurumsal yatrmclar yatrm ofonu, sigortairketleri gibi reit yatrmna yneldi ve reit zsermayeerinde 1993 1997 arasnda bir patlama yaand.

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kgaydinSticky Note1998 de piyasada gerileme. dotcom bubble la birlikte teknoloji hisselerine yatrm artt. bylece sermaye piyasalarndaki bir trendin reitleri,n performansn etkilemesi u soruyu gndeme getirdi: gayrimenkul hisseleri varlk portfolyosunun bir yansmas m yoksa daha geni bir pay piyasasnn paras m?


stocks a reflection of the underlying property portfolio, or are they a part of thebroader stock market?

REITs IN THE NEW MILLENNIUM

After the Wall Street equity tap had been shut during most of the 19982001 period,the dotcom crash provided REITs with fresh opportunities to access capital. After anumber of corporate scandals, the 2002 Sarbanes-Oxley Act enforced strict provisionson disclosure by listed companies, which significantly raised the cost of going public.Therefore, the early years of the 2000s saw mostly secondary equity offerings (SEOs)by already listed REITs looking for capital infusions.

In the meanwhile, the REIT sector slowly matured into a better understood investmentclass and thus tried to leave the turbulent times behind. The real estate crash of 2008did put a lot of REITs into jeopardy, although the real pain lay with mortgage debtand related complex securities such as commercial mortgage-backed securities(CMBS) and collateralized debt obligations (CDOs). The real estate downturn resultedin a widespread global economic crisis, which made the cost of debt surge andreinstated real estate prices to lower levels.

REITs ON TOUR

Following on the success of the U.S. REIT industry, countries all over the world haveinstituted similar real estate structures in an attempt to facilitate the development oftheir domestic real estate industries. The first country to pick up on the tax-exemptstatus of real estate companies was the Netherlands, which in 1969 instituted theFiscale Beleggings Instelling or FBI (EPRA, 2009). Although a number of othercountries instituted REIT-like structures in the following decades, it would not be untilthe early 2000s that several countries in Asia turned to the REIT as a way to injectliquidity and new capital into the real estate sector that suffered heavily during theAsian financial crisis of 1997. Most European countries have introduced REITs intheir legislative regime only quite recently and the success of these structures thereforelargely remains a question to be answered.

In following section, we first consider the countries that adopted REIT-like structuresin the 30 years after the introduction of the U.S. REIT. After that, we will considertwo important regional developments that greatly added to the widespread adoptionand popularity of the REIT structure; the Asian REIT market development in the early2000s, and the European REIT adoption in the latter part of the decade.

EARLY INTERNATIONAL ADOPTERS

The Dutch were the first to adopt a REIT-like structure after the REIT legislation inthe U.S. in 1960. The countrys history of affinity with real estate and pressure fromits large pension funds to institute a beneficial legal structure for holding real estatemade the Dutch legislator pay particular attention to the developments that were taking

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kgaydinSticky Note2002 dotcom krizi reitler iin yeni bir frsat yaratt. 2002 sarbanes oxlevt yasas halka alma maliyetini artrd bu yzden ikincil halka arzlar yaygnlat.

Halka Arz: ok sayda yatrmcya irkete ortak olmalar amacyla yaplan ar.

Halka alma: Halka kapal bir anonim ortaklk tarafndan ilk defa yaplan pay halka arz.

ikincil halka arz: nceden hisse senetlerini halka arz etmi ortaklklarn, tekrar hisse senedi arzlar.

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place in the U.S. Apart from the Netherlands, in Europe only Belgium and Greeceadopted REIT structures before the turn of the century. Belgiums SICAFI wasintroduced in 1995 (Societe dinvestissement Immobilie`re a` Capital Fixe) as anattempt to promote real estate investments in a relatively safe, tax beneficialenvironment. SICAFIs are listed, closed-end funds with a corporate structure. Exhibit1 provides an overview of REIT-like structures around the world.

Another early adopter of the REIT structure has been Australia, which has had listedproperty trusts (LPTs) since 1971. General Property Trust (GPT) is the first AustralianLPT to be listed on the countrys stock exchange. The country also allows for privateREITs, known as unlisted property trusts. Since March 2008, the legislation on LPTshas been amended and the trusts have been renamed Australian REITs (A-REITs), inline with international customs. The REIT market in Australia is particularly large,with no less than 66 listed A-REITs at the end of June 2009 with a combined marketcapitalization of $43 billion, thus comprising 12.2% of the global REIT market(EPRA, 2009). The maturation of the Australian REIT market has allowed theseentities to enjoy a head start in the internationalization of the REIT industry, andmany A-REITs are now active outside of Australia.

Several South American countries have implemented REIT-like structures. Puerto Rico(1972), Chile (1989), Brazil (1993), and Costa Rica (1994) were largely ahead of theREIT explosions in Asia and Europe (EPRA, 2009). The motives for adopting REITregimes have traditionally been in line with those mentioned in the U.S., particularlyas a vehicle to promote real estate investments. Nevertheless, the size of the REITindustry in South America is dwarfed when benchmarked to Asia, North America,and Europe.

THE ASIAN REIT BOOM

Despite the existence of REIT-like structures in countries such as Australia andMalaysia, the REIT did not receive significant attention on the Asian continent untilthe turn of the century. At that time, several supply and demand side factors cametogether and caused the emergence of REITs in a number of Asian countries.Interestingly, real estate companies as well as non-real estate corporations andfinancial institutions together pushed for the introduction of REITs. In Japan and SouthKorea, banks used REITs in an attempt to recapitalize their balance sheets on theback of an increasing percentage of non-performing loans. In Singapore, REIT stockstraded at significant premiums to NAV, which made it an interesting vehicle for realestate companies to access new capital and reduce the dependency on bank financing(Ooi, Newell, and Sing, 2006). Corporations saw REITs as an opportunity to exit theirownership of real estate. An example is Japan Airlines Corporations, which sold itscentral Tokyo headquarters to a J-REIT run by Nomura Real Estate for JPY 65 billionin 2005. On the demand side, REITs have been perceived to be less risky than stocks,but provide higher returns than bonds. Historically low interest rates in countries likeJapan and Singapore also added pressure on investors to seek higher-yielding financialproducts. With most of the Asian economies recovering from a recession, investingin REITs in the early 2000s provided an opportunity to gain exposure to real estatewith much upside as indices would gravitate upward again.

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kgaydinSticky Noteasyada daha ok gm irketleri ve dier irketler ve finansal kurulular biraraya gelerek reiti sundu. japonya, kuzet kore bankalar reiti bilanolarnda sermaye yaplarn yeniden dzenleme abas amacyla kullandlar (artan oranda batk kredi)

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kgaydinSticky Notebankalardan finansman salama bamllna son vererek, yeni sermaye frsatlar yaratt. hisselerden daha az riskli aralar ve daha yksek getiri salyorlar. asya piyasalarnda faiz oran 0 a yakn, 2000 lerde reit popler oluyor.

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Exhibit 1REIT Regimes around the World

Country Legal Name Incepted # REITs Leverage Restriction y /n Profit Distribution

Belgium SICAFI 1995 14 Yes, 65% of assets 80% of net income

Finland FINNISH REIT 2009 0 Yes, 80% of assets 90% of net income

France SIIC 2003 46 Yes, thin capitalization rules 85% of tax-exempt profits, 50% ofcapital gains

Germany G-REIT 2007 2 Yes, equity must equal at least 45%of total assets

90% of net income

Greece REIC 1999 2 Yes, 50% of assets 35% of net income

Israel REIF 2006 1 Yes, 60% of assets 90% of net income plusdepreciation

Italy SIIQ 2007 1 Yes 85% of income derived from realestate rental or leasing

Lithuania REIT 2008 0 Yes, 75% of net assets No requirements

Luxembourg SIF 2007 0 No No requirements

The Netherlands FBI 1969 8 Yes, 60% of property 100% of net income

Spain SOCIMI 2009 0 Yes, 70% leverage ratio 90% of income derived from realestate rental or leasing

Turkey REIC 1995 13 Yes, short-term credits limited tothree times NAV

20% minimum as first dividendratio

U.K. UK-REIT 2007 21 Yes, interest cover test 90% of tax-exempt profits

Europe 108

Australia Unit Trust 1971 66 Unlimited, subject to general thincapitalization rules

Typically 100% of trusts netincome

Dubai REIT 2006 0 Yes, 70% of net assets 80% of net income

Hong Kong HK-REIT 2003 7 Yes, 45% of gross assets 90% of annual net income

India REMF 2008 0 Yes, 20% of net assets As per offer document & SEBIguidelines

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Exhibit 1 (continued)REIT Regimes around the World

Country Legal Name Incepted # REITs Leverage Restriction y /n Profit Distribution

Japan J-REIT 2000 41 No 90% of net income

Malaysia MREIT 2002 13 Yes, 50% of assets 90% of net income

New Zealand PIE 2007 8 No No requirements

Pakistan Pakistan REITs 2008 0 Yes, must not exceed 60% of REIT 90% of net income

Philippines TBA Pending 0 Yes, 35% of property 90% of net income

Singapore S-REIT 1999 20 Yes, 35% (this leverage limit may beincreased to 60%)

90% of net income

South Korea REIC 2001 6 Yes, max debt-to-equity ratio of 2:1 90% of net income

Taiwan REIT /REAT 2003 8 Yes, 35% leverage ratio Pursuant to the REIT contract

Thailand PFPO 1992 6 Yes, borrowing is prohibited 90% of net income

Asia and Oceania 175

South Africa Property Unit Trust 2002 5 Yes, 30% of assets Capital gain must be reinvested

Africa 5

Brazil FII 1993 27 No 95% of net income

Canada MFT 1994 32 N/A 100% of net income

Chile FII 1989 N/A Yes, 50% of equity 30% of net income

Costa Rica REIF 1997 N/A Yes, 20% of assets No requirements

Mexico FIBRAS 2004 N/A Yes, thin capitalization rules 95% of net income

Puerto Rico REIT 1972 N/A No 90% of net income

U.S. US-REIT 1960 171 No 90% of net income

Americas 230

Note: In this table, we list an overview of the REIT standards across markets. For each market, we state the legal name of the regime, the year ofinception, the number of REIT trading at year-end 2010, and whether or not restriction apply regarding corporate debt and dividend policies.


In the development of the Asian REIT markets, Japan has been leading with theintroduction of the J-REIT in 2000. The entity was introduced with an amendment tothe Investment Trust and Investment Corporation Law in November 2000 (InvestmentTrust Law or ITL). The first two J-REITs, the Office Building Fund of Japan andthe Japan Real Estate Investment Corporation, were listed on the Tokyo StockExchange in November 2001 (Ooi, Newell, and Sing, 2006). As of March 2009, Japanhas 41 J-REITs with a market value of about $25 billion. Unlike its U.S. counterpart,J-REITs are subject to corporate taxes, but are exempt from dividend tax if itdistributes more than 90% of its accounting profit. Japan set an example that wouldbe followed by all the Asian countries except South Korea by structuring their REITsas trusts, much like Australias A-REITs.

Singapore has allowed for real estate funds since May 1999, when the MonetaryAuthority of Singapore (MAS) released guidelines that arranged for the possibility oftax transparency for Singapore real estate companies. It would however take morethan three years before CapitaMall Trust (CMT) listed as the first S-REIT on theSingapore Exchange in July 2002. Interestingly, an earlier attempt by SingMallProperty Trust (SPT) in October 2001 failed due to undersubscription for its shares.In December 2002, the Singapore authority loosened the requirements for taxtransparency, most notably by reducing the profit distribution requirement from 100%to not less than 90% (Ooi, Newell, and Sing, 2006). A further wave of regulatorychanges has been implemented in 2005, in an attempt to further boost the developmentof the S-REIT industry. At the end of June 2009, there were 20 S-REITs with acombined market capitalization of around $12 billion; CMT was still the largest S-REIT with a market capitalization of $3 billion, followed by Ascendas REIT with$1.5 billion.In July 2003, both Hong Kong and Taiwan established their guidelines for REITs.The HK-REIT had several disadvantages compared to competing REIT structures inother Asian countries. The REITs did not receive tax transparency and were notallowed to own property outside of Hong Kong. In 2005, the Code on REITs wasrevised. After an initial IPO in December 2004 failed due to a legal challenge froma tenant, in November 2005 the first REIT IPO in Hong Kong took place. Link REITwas with $2.6 billion the largest REIT IPO in the world. At the end of June 2009,there were 7 REITs in Hong Kong with a combined market capitalization of $6 billion.The development of Taiwans REIT market was hampered by the organization ofREITs as closed-ended funds. Legislation has step-by-step been loosened and at theend of June 2009, Taiwan had 8 REITs with a combined market capitalization of $1.5billion.

THE EUROPEAN REIT BOOM

With an eye on the success of the REIT adoption in Asia, European policy makersstarted considering the options for their own countries. The two strongest motives forthe adoption of REIT-like tax regimes were broadly in line with those in the U.S.First, REITs were seen as a vehicle that would allow small investors the benefits ofinvesting in large diversified portfolios of real estate, while avoiding the tremendous

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transaction costs traditionally associated with investing in direct real estate. Second,the REIT structure is well suited to decrease the cost of capital for real estatecompanies, makes these companies more competitive, and encourages an efficientallocation of capital (Campbell and Sirmans, 2002). Another motive for someEuropean governments to allow the REIT structure is that it provided an exitopportunity to their sometimes substantial holdings in real estate. Finally, as the REITindustry in other countries starts to mature, REITs are expanding internationally andcompeting with real estate companies in Europe. The tax disadvantage of Europeanreal estate companies put them in a difficult position to keep up with competitors.

The European widespread adoption of tax beneficial real estate vehicles started withthe implementation of the SIIC (Societes dInvestissements Immobiliers Cotees)structure in France in 2003. The legislation aimed to allow foncieres, which are Frenchjoint-stock corporations managing real estate assets, to attain conduit status and thustransform into SIICs. The motives behind the introduction of the SIIC were threefold.First, it was used as an attempt by the listed real estate sector to align the competitiveposition with that of non-resident investors to match the tax regime of other Europeancountries. Second, the French government believed the introduction would enablethem to decrease their budget deficit through the exit tax it would levy on unrealizedcapital gains of property companies converting to the SIIC structure. Third, propertycompanies thought that the persistent discount to NAVs would evaporate as theyconverted into tax transparent legal entities. After introduction in 2003, the legislationon SIICs has been amended several times and today the French REIT-like structureis a particularly liberal competitive structure within the domain of European taxbeneficial real estate company structures. The SIIC has become an extremelysuccessful vehicle, at the end of June 2009 there were 46 SIICs with a combinedmarket capitalization of $40 billion. The French-Dutch real estate giant Unibail-Rodamco is by far the largest SIIC, which at that time had a market capitalization ofalmost $11 billion.It took almost four years and a tremendous amount of lobbying from industry groupsbefore the United Kingdom followed suit and introduced its own REIT-like structure.The UK-REIT structure became a reality on January 1, 2007, on the basis of aprovision in the UK Finance Act of 2006. Immediately, nine real estate companieselected to become REITs, and many followed soon after. UK-REITs originally wereclosed-ended companies that had to distribute 90% of their income profits in order toreceive the tax advantages associated with the REIT structure. As European countriesstarted to implement REIT structures, the Netherlands continued the trend of evercompetitive tax legislation by loosening its FBI regime. In response, the UKannounced a large overhaul of its REIT regime. The Corporation Tax Act of 2010provides broad simplifications and liberalization of the provisions dealing with UK-REITs. At the end of June 2009, the UK had 21 REITs with a combined marketcapitalization of $23 billion.On March 30, 2007, the German real estate investment trust law went into effect,creating the possibility for companies to establish G-REITs. Just like its U.S.counterpart, G-REITs are not subject to corporate taxes, but are required to distributemost of their annual income as dividend to shareholders. G-REITs exhibit two main

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differences in comparison with international REITs. The negative difference is thatholding residential property built before January 1, 2007 is not allowed. The positivedifference is that capital gains tax, which is normally 40% in Germany, is cut in halffor property sales to G-REITs, making it a very attractive structure for buyers(Busching, 2007).After the major European countries implemented their REIT regimes, otherneighboring countries were quick to follow. Italy instituted its Societa`dIntermediazione Immobiliari Quotate (SIIQ) in July 2007, although only onecompany has opted for this corporate type REIT structure so far. In response to thedistressed real estate market in Spain, the countrys government is working onlegislation to implement Sociedades Cotizadas de Inversion en el MercadoInmobiliario (SOCIMIS). Unlike other European REIT structures, SOCIMIS do notenjoy a fully tax-exempt status, but instead are subject to 18% corporate tax.

DATA AND METHODOLOGY

In this study, we collect data on 210 REITs in Asia, Europe, and North America listedon the GPR 250 Index, the GPR 250 Europe Index, and the EPRA REIT Indices. Byincluding only those REITs that are part of these indices, we neglect the smallersubsection of the REIT industry. These stocks are expected to be less liquid, andtherefore may distort the empirical research on REIT returns as their stocks are notas informationally efficient as those of larger REITs. For the Asian continent, wegather data from the four largest REIT markets: Japan, Singapore, Australia, and HongKong. The European continent includes data from REITs in the U.K., France, and theNetherlands. The North American REIT data come from Canada and the U.S. Exhibit2 offers an overview of the size, property-type diversification, geographic focus,property development, and age of the sampled REITs across markets.

Using data from Thomson Reuters Datastream, we obtain monthly total return datafor the included REITs. The time series go back to October 1990 whenever possible.A survivor bias may be present in the sample, which demands additional attention inthe interpretation of the test results from the early time periods. Using annual balancesheet data from Standard & Poors Capital IQ, we construct profiles of the propertytype and geographic diversification of the REITs. When the data are not available inthis database, we supplement with annual report data from the company websites.Also, we construct a measure of the degree of property development by dividing theamount of property under development by the total property portfolio reported on acompanys balance sheet, as proposed by Brounen, Eichholtz, and Kanters (2000).Exhibit 2 shows that Hong Kong REITs are, on average, among the oldest in theworld. In fact, the Hong Kong REITs in our sample also stand out with respect toleverage, which is remarkably low in Hong Kong, and likely due to the fact that theseREITs are mostly specialized in one type of real estate. The long track record, butmore so the vast size of Hong Kong REITs, is key to the high correlation betweentheir REITs and the contemporaneous common stock market. In Hong Kong, the realestate market is a significant portion of the national stock market. When comparing

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Exhibit 2Summary Statistics of the International REIT Samples

Size(US$ bn)

Debt Ratio(%)

Age(Years)

TypeFocused (%)

RegionallyFocused (%)

DevelopmentRatio (%)

Return(%)

Risk(Std. Dev.)

Correlationwith Stocks

France 5.3 43.1 28.6 10.9 15.2 2.6 4.53 31.32 0.62

The Netherlands 2.1 36.2 31.3 25.0 12.5 1.5 0.84 20.99 0.64

U.K. 1.6 41.2 38.1 66.7 100.0 10.0 0.24 23.87 0.57

Australia 4.1 30.6 20.4 7.6 12.1 N/A 2.43 25.08 0.76

Hong Kong 3.7 21.0 36.2 71.4 42.9 68.0 10.69 33.74 0.85

Japan 3.1 49.5 21.1 22.0 68.3 2.1 11.62 34.47 0.76

Singapore 2.0 33.1 5.8 0.2 35.0 N/A 16.08 39.73 0.84

Canada 2.2 61.5 16.6 12.5 40.6 2.5 2.55 32.53 0.52

U.S. 3.1 54.8 20.9 11.1 12.3 4.8 5.54 19.54 0.64

Note: In this table, we state the summary statistics of the 204 REITs. For each REIT we collect data regarding firm size, debt-ratio (as total debt overtotal assets), firm age, whether firms have focused their asset portfolio across property types and geographical regions, the proportion of assetscommitted to property development, the annual stock returns, standard deviations and correlation with the local common stock market. We list theaverages of these items for each national sub sample. Regarding property focus, we apply a standard cut-off point of 75%. In case 75% or more ofthe asset portfolio is focused in one property type or region, we consider the REIT as focused. The statistics in this table indicate the portion offirms in each national sample, that qualified as focused according to this standard.


Exhibit 3REIT Market Capitalization

This figure shows the sum total market capitalization of all the REITs in our nine national markets,clustered as continents. We state the numbers as $ millions.

this to Canada, where REITs are small and relatively young, this coherence with thecommon stock market is much weaker. Overall it seems that the dispersion of REITcharacteristics is rather vast when comparing across markets. For instance, debt ratiosvary between 21.0% (Hong Kong) and 61.5% (Canada), firm ages range from 5.8years (Singapore) to 38.1 years (U.K.), and average annualized returns hover between0.84% (the Netherlands) and 16.08% (Singapore). Regional focus of the propertyportfolio is high in the U.K. and Japan, while REITs in Australia and Singapore aremostly diversifying their properties across various real estate types.

The sample includes 41 European REITs, which makes it the smallest of the threeregional subsets. Seven of the REITs are listed in the Netherlands, 10 are from France,and 24 are from the U.K. Of the latter two countries, the REIT structure has onlyvery recently been implemented and most of these companies operated as commonproperty companies before. Caution should thus be taken when drawing conclusionsfrom return data from this period. We also analyze 63 REITs from Asia and Oceania,of which 17 are from Australia, 7 from Hong Kong, 29 from Japan, and 10 fromSingapore. Similar to the European sample, a part of the return data are from periodsduring which these companies were not legally organized as REITs yet, and cautionis again warranted in the interpretation of the results. The North American part of thesample contains 106 companies: 91 are U.S. REITs and 15 are Canadian REITs. Thissubset is by far the largest part of the sample; U.S. REITs have been operating withinthe legal context of REITs for a long period. Exhibit 3 shows the evolution of thesum aggregated market capitalization of the REITs in our sample.



We analyze the stock performance of our sampled REITs using various asset pricingmodel specifications. We start by applying Sharpes (1964) conventional CAPManalysis:

R R [R R ] , (1)it it it mt twhere we relate the excess stock return of REIT i over period t over the risk-free rateof return to excess national market return for the corresponding period. We usenational stock market indices as a proxy for the unobservable market index, and theone month Treasury bill rates as the risk-free rate of return.

To assess the robustness of our estimation of the stock outperformance () and loadingon systematic risk (), we also run a three-factor model specification:

R R [R R ] HML DIV . (2)it it it mt t it itIn this model, we extend the single factor specification by including measures forvalue (HML) and dividend effects (DIV). In line with Fama and French (1992), wecalculate HML as the return differences between top and bottom portfolio rankedbook-to-market ratios, while DIV is the differences in return of the top versus bottomdividend paying firms.1

Once the REIT alphas and betas are estimated as indicators of historicoutperformance and risk, we continue our empirical analysis by explaining the cross-sectional distribution of these indicators. For this exercise, we consistently relate bothalpha and beta in a stepwise analysis to three sets of factors:

c Region FirmCharacteristics PortfolioStrategy . (3A)it i 1 2 3 c Region FirmCharacteristics PortfolioStrategy . (3B)it i 1 2 3

First, we relate our firm estimates for alpha (beta) to a set of regional dummies. Herewe estimate Europe and Asia and use North America as reference group. We thenexpand this model by including a set of firm-specific characteristics: the log firm size,leverage ratio, and the age of the firm. We regard these firm characteristics asimportant control variables that have proven to be of importance to both the returnand risk profile of REITs. Finally, we add three indicators for portfolio strategy intothis cross-sectional OLS model. For each firm, we measure the level of property typefocus of the asset portfolio, the regional distribution of their assets, and the extent towhich the REIT is involved in property development activities. Following Benefield,Anderson, and Zumpano (2009) and Ambrose and Linneman (2001), we classifyREITs as type-focused if at least 75% of their property portfolio is invested in asingle industry. In that case, the type focus type will be one, and zero otherwise. Inline with earlier work by Boer, Brounen, and Op t Veld (2005), we also quantify theregional focus of property portfolios by labeling REITs that invest 75% or more ofproperty portfolio within one geographic region, as regionally focused.2 In that case,the regional focus dummy will be one, and zero otherwise. Finally, we also considerthe level of corporate involvement in property development activities as a strategic


choice of REITs. Like Brounen, Eichholtz, and Kanters (2000), we expect that thehigher risk profile of development projects may affect the beta of firms. By combiningall the relevant data of financial statements, we estimate an average development ratiofor each REIT by dividing the book value of their development projects over theirtotal assets. REITs that have more than 3.7% of their property portfolios invested indevelopment projects are considered as developing REITs. Again, we use a binarydummy to distinguish them from REITs that invest less or not at all in development.

REIT PERFORMANCE ANALYSIS

MEASURING REIT OUTPERFORMANCE AND RISK

Exhibit 4 presents a summary of the output of our different asset pricing modelestimations. Panel A reports the alpha and beta loading of our single market model,both for the full sample and for the sub-period of 20002007. In the CAPM estimates,there is a vast difference in model fit across the three regions. In the Asian REITsample, the simple CAPM model explains almost 65% of the return variations overtime, whereas in the European and U.S. markets, the model fit is close to 37%. Thisdifference is most likely due to the fact that in many Asian markets the REIT industryrepresents a relatively large proportion of the overall financial market. Hence, REITreturns, by definition, relate more strongly to the movements of the overall market.The sensitivity to overall stock market movement, the systematic risk (beta), of AsianREITs is also highest. But in all three markets, the risk estimates indicate that REITsare qualified as a low-risk investment category, with average betas all below 0.6.Concerning the stock outperformance of REITs, measured as alphas, this is positivein all three markets. The Asian REITs have offered the highest outperformance, butin all markets these average alphas lack statistical significance. This may be due tothe inclusion of the 20072010 period, a time when the real estate sector suffered atremendous blow and went out of sync with the broader stock market.

The distribution of REIT alphas is also graphically presented in Exhibit 5; the vastmajority of individual alphas are indeed positive and a larger portion of the highestalphas is in fact Asian. To assess the robustness of the results, we also repeat theanalysis for the sub-period 20002007. Panel B in Exhibit 4 shows that sub-periodscan result in egregious alphas, an effect that is apparent in all the countries. Whilethis period was indeed one of a global real estate boom, the results may be misleadingas the R2 and F-statistic are often quite low. This hints towards a misfit of the marketmodel with the REIT returns. This makes it more interesting for us to test the returnsusing a multi-factor model specification.

Panel B of Exhibit 4 is an overview of the estimates of the three-factor model on thenon-weighted country REIT indices. The analysis was conducted on the 19902007data, thereby excluding the extreme return statistics observed during the recentfinancial crisis. The results show that the two additional explanatory variables addonly minor improvements to the predictive power of the model, as R2 in most caseshas improved only by a few percentage points. The market index remains the mostprominent explanatory variable in the returns of REITs, with all of the sensitivity



Exhibit 4REIT Asset Pricing Estimations

Mean Std. Dev. Min. Max. R2

Panel A: CAPM

Full sample: 19902010AlphaEurope 0.080 0.49% 1.620 0.940 37.23%Asia and Oceania 0.870 0.74% 1.230 3.310 64.70%North America 0.480 0.74% 1.450 3.210 37.83%

BetaEurope 0.471 8.59% 0.295 0.617Asia and Oceania 0.587 13.68% 0.143 0.856North America 0.492 11.63% 0.138 0.797

Sub-sample: 19902000AlphaEurope 1.200 0.47% 0.036 1.938 16.09%Asia and Oceania 1.060 0.76% 0.017 3.631 35.69%North America 1.120 0.59% 0.903 3.411 13.09%


Panel B: Three-factor Model

AlphaEurope 0.090 0.55% 1.480 0.970 24.90%Asia and Oceania 0.470 0.71% 1.220 3.240 63.65%North America 0.470 0.78% 1.480 3.200 39.58%


(HML)Europe 0.034 7.22% 0.044 0.690Asia and Oceania 0.136 14.10% 0.009 0.228North America 0.267 9.79% 0.301 0.008

(DIV )Europe 0.072 10.06% 0.042 0.122Asia and Oceania 0.211 14.55% 0.013 0.383North America 0.019 8.62% 0.079 0.090

Notes: This table presents the estimation results of various asset pricing model specifications.Panel A gives the output of the standard CAPMmodel, with the local stock market indices asmarketproxy. Panel B gives the results of a three-factor specification, in which we extend the marketmodel by also considering factor loadings on value (HML) and dividend yields (DIV ).


Exhibit 5Distribution of REIT Alphas

This figure plots the distribution of monthly alphas that originate from the CAPM modelestimation over the time period 19902010.

measures ( market) both positive and significant at the 5% level. The book-to-marketeffect ( BE /ME) is not evident from this analysis, since both positive and negativebetas are found, with only two of eight analyses surpassing the test of significance.The dividend payout effect ( DIV) is also ambiguous, although all the five significantresults do report a small negative relation between dividend payout and REIT returns.Country differences are in line with those earlier reported in the CAPM analysis. Thefour Asian REIT indices are most sensitive to their market index movements, possiblyan effect of many of the REITs in the region being blue-chip companies. Canada,Japan, and Singapore delivered remarkably high alphas, with 1.21%, 0.85%, and0.74%, respectively. Nevertheless, with the exception of Canada, none of the alphasare significantly different from zero. The French and Dutch REIT indices produce thelowest market betas (0.396 and 0.363), which may suggest the REITs in thesecountries are less dependent on equity market movements and driven more by thedynamics in the real estate industry.

We have also estimated REIT betas for various sub periods to test for robustness.Exhibit 6 shows that the averaged trailing REIT beta gradually increased over oursample period. REIT betas only declined during the high tech boom and bust of thelate 1990s, when stock investors first ignored the low-yielding real estate stocks whenthe tech funds offered double-digit returns. As soon as the tech market crumbled,investor fled to safety and rediscovered REITs as a safe alternative, boosting REITreturns beyond the common stock averages. This temporal era of sector rotation



Exhibit 6Average REIT Betas over Time

This figure plots the averaged trailing REIT betas for the 204 REITs. We estimate betas using theCAPM model and the local stock market index as a market proxy over three-year periods ofmonthly data.

among investors reduced the coherence between REITs and the stock market, but thisrelation strengthened again during the most recent decade.

EXPLAINING REIT OUTPERFORMANCE AND RISK

In this section, we discuss the cross-sectional variation in individual REIT alphas andbetas by regressing these on various sets of explanatory variables. There are threephases in the analysis. We first examine the significance of any regional variations inREIT performance using continental dummies. In the second phase, we extend themodel by including REIT-specific characteristics: size, leverage, and age. Finally, weassess the importance of investment strategies within REIT property portfolios byusing measures of the level of property-type diversification, geographic focus, andproperty development involvement, again for the individual REITs.

As we move from time series regressions to ordinary regressions, we combine thesample of 204 REITs in an attempt to satisfy the statistical requirements regardingsample size. As mentioned in the methodology section, size is measured as the averagemarket capitalization over the sample time period. Larger REITs may enjoy scalebenefits that allow them to outperform their smaller peers. Size is transformed intoits logarithm in order to overcome issues from the observed heavy right tail in itsoriginal distribution. Leverage is measured as the average debt ratio over the sampletime period. For obvious reasons, leverage impacts the risk/return profile of


companies and thus may influence the risk profile of companies. Age is the thirdvariable in the first phase of testing. Older companies may have established a moresolid name among investors and thus help facilitate superior returns over newcomersin the industry.

The third phase of this analysis introduces the three quintessential strategic choicesthat REITs make. The level of property-type diversification may tarnish the ability ofREITs to deliver superior returns on the basis of a lack of knowledge of operating indifferent real estate segments. As the sample is dominated by specialized REITs, thisgroup forms the base category in our analysis using dummies to probe the meandifference between the two groups. The local character of real estate is expected todrive investors to reward a geographic focus among REITs, inasmuch as engaging inreal estate investing in outside regions would be considered risky. We use thediversified group as the base category for this analysis. Finally, property developmentinvolves a risky engagement that requires specific expertise, while also potentiallyproviding REITs with an opportunity to outperform competitors based on their abilityto develop in prime locations. Non-developing REITs are used as the base category.

Exhibit 7 provides an overview of the regression results of the observed alphas. Wereport the results for the analysis of the full sample, as well as the time periods 19902000 and 20002007. The predictive power (R2) of the full sample model increasesfrom 12.1% up to 22.1% as we progress through the three phases of modelspecification. Although this is not exceptionally high, the fact that the dependentvariable is in essence a derivative of earlier research steps supports the predictivepower of the model.

The first columns of each output cluster in Exhibit 7 contain the results of the simplemodel, which only corrects for regional variations. Obviously, the explanatory powerof this model is weak at best. These initial results indicate that European REITsunderperformed their U.S. peers, but only during the 1990s, when the U.S. REITmarket was blossoming. Since the turn of the millennium, this situation reversed andEuropean REITs have been performing best. The REITs from Asia and Oceania havedelivered competitive alphas all around. Both during the first and second half of thesample period, Asian REITs outperformed the U.S. market, but these differences havenever been statistically significant.

When extending this basic regional model with control for REIT-specificcharacteristics, we document a vast increase in the model fit. Moreover, we findconsistent proof for a size premium among REITs, with large REITs delivering thehighest alphas. The effects of leverage and age on REIT alphas appear less compelling.When also including the strategic choices of REITs in our sample, we find evidencethat property type specialization is associated with the highest alphas. These resultsare in line with Boer, Brounen, and Op t Veld (2005), and indicate that managing aREIT portfolio that is scattered over different types of real estate destroys value.Regarding the geographical focus of the asset portfolio and the extent to which REITsare active in property development activities, we find no pervasive effects on alpha.

In Exhibit 8, we provide the results of the same type of OLS analysis on REIT betas.We also relate the same clusters of explanatory variables to explain the cross-sectional

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Exhibit 7Explaining the Cross-Sectional Variation of REIT Alphas

Full Sample 19902000 20002007

I II III I II III I II III

RegionEurope 0.323 0.187 0.24 0.239 0.19 0.255 0.263 0.361 0.337

(3.16) (1.68) (2.03) (1.97) (1.42) (1.82) (2.22) (2.91) (2.57)

Asia and Oceania 0.247 0.273 0.142 0.159 0.114 0.017 0.138 0.053 0.032(2.24) (2.39) (1.13) (0.90) (0.53) (0.07) (1.10) (0.42) (0.16)

REIT CharacteristicsLog Size 0.244 0.304 0.118 0.144 0.400 0.392

(2.72) (3.19) (1.09) (1.23) (4.13) (3.80)

Leverage 0.007 0.005 0.001 0.000 0.001 0.001(1.05) (0.64) (1.30) (0.59) (0.27) (0.43)

Age 0.003 0.002 0.004 0.002 0.001 0.001(2.73) (1.97) (0.28) (0.06) (0.21) (0.48)

Strategic ChoicesType Specialized 0.111 0.034 0.234

(1.28) (0.31) (2.19)

Region Specialized 0.188 0.190 0.214(1.99) (1.64) (2.05)

High Development 0.117 0.143 0.221(1.06) (1.00) (1.76)

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Exhibit 7 (continued)Explaining the Cross-Sectional Variation of REIT Alphas

Full Sample 19902000 20002007


R2 12.1% 18.2% 22.1% 5.4% 8.3% 12.8% 4.0% 17.7% 19.7%

N 204 204 204 146 146 146 204 204 204

Notes: This table gives the results of our cross-section OLS regressions on individual REIT alphas (from the CAPM model). We regress alphas on aset of regional dummies, firm characteristics, and portfolio strategy indicators. For the regional variation, the North American markets are ourreference group. Regarding firm-specific characteristics, we consider the logged firm size (total assets), leverage (debt ratio), and firm age (in years).To capture the performance effects of portfolio strategies, we include three binary dummies. Type specialization measures corporate focus, and isone if at least 75% of the assets belong to a single property type, and zero otherwise. Region specialized also measures corporate focus, but acrossgeographic regions, and is one of at least 75% of the assets are located within one region, and zero otherwise. High development is a dummyvariable that indicates whether the ratio between the book value of property development activities and total assets exceeds the national sampleaverage. The t-statistics are in parentheses below the coefficient estimates.

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Exhibit 8Explaining the Cross-Sectional Variation of REIT Betas

Full Sample 19902000 20002007


RegionEurope 0.193 0.164 0.178 0.018 0.013 0.036 0.037 0.019 0.006

(3.45) (2.64) (2.70) (0.39) (0.27) (0.72) (0.62) (0.30) (0.05)

Asia and Oceania 0.097 0.149 0.161 0.609 0.459 0.42 0.323 0.365 0.413(1.58) (2.32) (2.23) (9.12) (6.07) (5.21) (5.01) (5.48) (5.30)

REIT CharacteristicsLog Size 0.053 0.072 0.043 0.046 0.024 0.045

(1.05) (1.35) (1.13) (1.12) (0.48) (0.80)

Leverage 0.003 0.003 0.004 0.004 0.003 0.003(1.90) (1.82) (1.42) (1.06) (2.63) (2.88)

Age 0.001 0.001 0.002 0.001 0.004 0.004(0.60) (0.74) (3.87) (3.81) (2.12) (1.93)

Strategic ChoicesType Specialized 0.033 0.042 0.043

(0.46) (1.10) (0.69)

Region Specialized 0.026 0.028 0.077(0.49) (0.69) (1.38)

High Development 0.038 0.005 0.010(0.68) (0.09) (0.15)

50Y

EA

RS

OF

RE

AL

EST

AT

EIN

VE

STM

EN

TT

RU

STS

219

Exhibit 8 (continued)Explaining the Cross-Sectional Variation of REIT Betas

Full Sample 19902000 20002007


R2 11.3% 15.5% 19.3% 46.8% 56.3% 57.6% 17.2% 24.2% 25.6%

N 204 204 204 146 146 146 204 204 204

Notes: This table gives the results of our cross-section OLS regressions on individual REIT alphas (from the CAPM model). We regress betas on aset of regional dummies, firm characteristics, and portfolio strategy indicators. For the regional variation, the North American markets are ourreference group. Regarding firm-specific characteristics, we consider the logged firm size (total assets), leverage (debt ratio), and firm age (in years).To capture the performance effects of portfolio strategies, we include three binary dummies. Type specialization measures corporate focus, and isone if at least 75% of the assets belong to a single property type, and zero otherwise. Region specialized also measures corporate focus, but acrossgeographic regions, and is one of at least 75% of the assets are located within one region, and zero otherwise. High development is a dummyvariable that indicates whether the ratio between the book value of property development activities and total assets exceeds the national sampleaverage. The t-statistics are in parentheses below the coefficient estimates.



variation in the systematic risk loadings of REITs. There is a difference in model fitacross the sample periods. It seems that explaining REIT betas was relatively easyduring the 1990s, since only controlling for regional variation would help youunderstand almost half of the risk profile of individual REITs. One potentialexplanation for this finding is the Asian REIT wave that started at the end of the1990s. Before the REIT introduction, many Asian real estate investment companiesfaced little regulations and were involved in more high-risk ventures than today.Hence, Asian REIT betas have been higher than in other parts of the world, and thissimple difference explains most of the early variations.

When taking a closer look at the risk analysis, we find that apart from the regionalvariations, REIT leverage is key to REIT betas. The textbook leverage effect alsoholds within the REIT industry, with higher systematic risk loadings for the highly-levered REITs. Firm size and age appear less relevant. Although the exposure toproperty development seems to increase beta in line with the earlier work of Brounen,Eichholtz, and Kanters (2000), this relationship lacks statistical power. Thespecialization level of the property portfolio also lacks convincing relevance withinthe beta analysis.

In conclusion, we find evidence that the return and risk profile of REITs as capturedby market betas is influenced by regional differences and in more modest form byleverage and portfolio focus. Both among alphas and betas, we still detect traces ofcontinental variation, which indicates that even after 50 years, the performance ofREITs has not integrated into one truly global real estate sector. Our results indicatethat it is important to study the capital structure of REITs when selecting REITs, asleverage drives systematic risk upwards. It is also important to knowledgeable aboutthe portfolios focus across property types. In line with earlier work, we find thatspecialized REITs offer the highest stock outperformance.

CONCLUSIONS

REITs have experienced tremendous growth since the passage of the U.S. Real EstateInvestment Trust Act in 1960. The benefits of enjoying a tax-exempt status on theone hand were offset by the obligation to maintain high dividend payout ratios on theother. In this setup, REITs provided an opportunity for small investors to access realestate in a liquid, diversified manner. Nevertheless, it would take a number oflegislative actions to expand the options for REITs to engage in property managementand development before the popularity of the trust structure could really take off.Most notably, the Tax Modernization Act of 1986 paved the way for the large-scaleadoption of REITs by institutional investors like insurance companies, mutual funds,and pension funds. The massive REIT IPO boom in 1993 was accompanied byoverbuilding, a surge in mortgage defaults, as well as a number of changes inlegislation governing institutional investors that brought REITs to the limelight asinteresting investment vehicles. Ever since, the U.S. REIT industry has gone throughperiodic booms and busts, while slowly maturing into a solid industry that has thesize to make it one of largest asset classes.

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Internationally, the expansion of REIT-like structures has taken several decades. Whilesome countries like the Netherlands were quick to adopt similar tax benefit rules thatpromoted investments in real estate companies, the U.S. REIT was not met withoverwhelming enthusiasm on the other side of the ocean. Finally, the 1990s witnessedthe widespread adoption of REITs in Asia that were mostly based on the Australianexample of listed property trusts, a real estate structure that had proven successfulsince the 1970s. On the European front, REIT-like structures emerged during the lastdecade, with some countries getting into the REIT game so recently that theimplementation of legislation has not even been completed yet.

In the second part of this study, we conducted several empirical analyses using totalreturn data from 210 REITs listed in Australia, Hong Kong, Japan, Singapore, France,the Netherlands, U.K., Canada, and the U.S. The dataset was created using the 19902010 time period; the sample was divided into the 19902000 and 20002007 timeperiods to take into account the real estate cycles within these periods.

First, we examined the issue of model specification for analyzing REIT returns. Usingmarket proxies in a CAPM specification, we found that REITs produce positiveabnormal returns and have outperformed their national indices particularly in 20002007. The sensitivity of REITs to tendencies in the broader stock market varies bycountry, with those of the U.S. being the lowest and in Asia the highest. In general,REITs appear less volatile than the overall stock market, which concurs with the imageof real estate as providing more stable returns than other asset classes.

In the final phase of our analysis, we analyzed the cross-sectional differences in REITreturns. We discuss the observed risk-adjusted performance as represented by alphaand the riskiness of REITs as described by beta from the CAPM analysis by regressingthese on a number of variables. We found that in the full sample and the 20002007period, alpha is significantly influenced by firm size and that geographically-focusedREITs deliver superior risk-adjusted returns compared with their diversified peers.The evidence for the advantages of property type diversification is less compelling.European REITs underperformed their North American counterparts during the 1990,but this situation reversed during the more recent years. We also found evidence thatthe risk profile of REITs as captured by market betas is influenced by regionaldifferences and firm leverage. Despite other research claiming a connection betweenproperty development and beta, we did not find proof of a strong link between thestrategic choices of REITs and their risk profiles.

ENDNOTES

1. We realize that alternative asset pricing models have been introduced. Early studies likeBrueggeman, Chen, and Thibodeau (1984, 1992), Titman and Warga (1986), and Chen andTzang (1988) demonstrate how multi-factor models fit better with REIT returns. Chan,Hendershott, and Sanders (1990) and Chen, Hsieh, and Jordan (1997) applied APT-basedmodels for U.S. REITs. Given the international scope of our paper however, we are not inthe position to obtain all the necessary time series on these factors in order to execute aconsistent analysis.

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2. We set the definitions of regions in line with Boer, Brounen, and Op t Veld (2005) as tothe North Pacific, South Pacific, the Great Plains, Southwest, Midwest, Southeast, Mid-Atlantic, and New England for the U.S. For Europe and Asia, we use country borders as aproxy for regions.

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Parsons, J.F.C. REITs and Institutional Investors. In R.T. Garrigan and J.F.C. Parsons (eds.).Real Estate Investment Trusts. New York, NY: McGraw-Hill, 1998.Sharpe, W.F. Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.Journal of Finance, 1964, 19:3, 42542.Titman, S. and A. Warga. Risk and the Performance of Real Estate Investment Trusts: AMultiple Index Approach. Journal of American Real Estate and Urban Economics Association,1986, 14:3, 41431.

We are grateful to the European Public Real Estate Association (EPRA) for their generoussupply of data.

Dirk Brounen, Tilburg University, The Netherlands or [email protected] de Koning, Boston Consulting Group, The Netherlands or [email protected].

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