David H. Downs

Is the Information Deficiency in Real Estate Evident in Public Market Trading

This paper examines the summary informativeness of trading in real estate securities. Prior literature on publicly traded real estate securities suggests that the information deficiency associated with local economies and unique rent dynamics will manifest itself as severe information asymmetry. To date, most studies concerned with these issues have focused on the conventional measures of liquidity (serial correlations, bid-ask spreads, etc.). However, the conventional measures have several shortcomings as pure measures of trading information. To address this issue, we use a vector autoregressive methodology pioneered by Hasbrouck. We examine the empirical proposition that information-gathering activities are related to trade informativeness. The evidence is consistent with a theoretical model in which traders are risk-averse and the number of information gatherers is small. Copyright American Real Estate and Urban Economics Association.

Capital Distribution Policy and Information Asymmetry: A Real Estate Market Perspective

This article examines the relation between the distribution of capital to real estate investors and a market-based measure of information asymmetry. Previous research suggests that information asymmetries decrease as capital is distributed to outside investors. However, little attention has been given to those firms for which the marginal benefit of increased distributions may be small. Our analyses are based on a sample of real estate investment trusts (REITs), which are popularly characterized as high yield investments due to the regulation of a minimum distribution policy. The extent to which information asymmetry is influenced by these regulations, as well as by the opaque nature of the underlying assets, is an interesting empirical question. The results based on several years of data indicate that the perception of asymmetric information is lower for REITs that distribute more capital to their shareholders. A decomposition of yield into income and return-of-capital components reveals no differential effect in information relevance. The insights drawn from the results may be useful in determining the efficacy of real estate capital distribution policies and regulations.

The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

This article examines real estate investment trusts (REITs) to determine the correspondence between short interest and subsequent prices. The theoretical basis for our tests comes from the overvaluation conditions created by a combination of costly short selling and heterogeneous beliefs. This article exploits the unique characteristics of REITS as they are similar with respect to high dividend payouts and differentiated by underlying real asset investments. An innovative aspect of the methodology involves partitioning firms based on investment focus as a proxy for transparency and as a determinant of heterogeneous beliefs regarding valuation. The findings (i) affirm the information content of REIT short interest and (ii) highlight the importance of investment focus in resolving the divergence in investor opinions of value. Overvaluation conditions exist among REITs with greater short interest and less transparency, whereas such valuation conditions do not appear among transparent REITs, regardless of the level of short selling.

Investment Analysis, Price Formation and Neglected Firms: Does Real Estate Make a Difference?

This paper examines the relation between information-gathering activities and price formation when the gatherers are small in number. Two measures of information asymmetry are estimated to test the cross-sectional effect of investment-analyst attention on price formation. The analysis contrasts firms that invest predominately in real estate assets to those that do not. Unlike most studies of the competition among information gatherers, the results in this paper indicate that liquidity worsens with increasing investment-analyst attention. These findings provide further evidence that information deficiency is an important economic trait, although real estate securities may suffer less from neglect than from asset-specific information asymmetry. Copyright American Real Estate and Urban Economics Association.

Assessing the Real Estate Pricing Puzzle: A Diagnostic Application of the Stochastic Discounting Factor to the Distribution of REIT Returns

This article applies a general asset-pricing framework and the volatility bounds methodology of Hansen and Jagannathan (1991) to REIT returns. The state of real estate asset pricing remains somewhat of a puzzle relative to the identification of state variables and the structural form of models. This article offers a framework whereby real estate asset-pricing models and data can be diagnosed to answer questions about the shortcomings. In addition, several nominated discount processes are investigated for success in pricing real estate securities. Although the nominated specifications demonstrate some success in satisfying the restrictions on the first and second moments of the real estate returns distribution, they do not successfully price the securities under a no-arbitrage condition. This result calls into question previous real estate performance studies that employ these risk-adjustment processes.

Why Do REIT Prices Change? The Information Content of Barron's "The Ground Floor."

This article examines the information content in a series of market commentaries covering the publicly traded real estate market. The data are constructed from REIT-specific announcements published in a widely disseminated source of market commentary. The empirical methodology is designed to test whether the unexpected price change and unexpected volume are significant on the announcement day. The results demonstrate that the market commentaries provide information that impacts prices and that investors use this information in their trading. Additional analysis suggests that prices change more in the period following the REIT boom than during an earlier period. This result seems somewhat puzzling given recent studies that report an increase in REIT market liquidity.

The linkage of REIT income-and price-returns with fundamental economic variables.

This article examines the relation between changes in macroeconomic variables and returns of Real Estate Investment Trusts (REITs). Previous studies show that stock prices quickly absorb news from changes in macro-economic variables. This study examines the components of REIT total returns, income- and pricereturns, to gain a more detailed understanding of how macroeconomic variables affect the movement of these returns. Results using monthly data show that changes in macroeconomic variables have a significant impact on the volatility of the income portion of REIT returns and the news shocks from these variables impact income return volatility for more than one month in duration. These findings may assist REIT investors in their approaches to risk-management.

Are High-Cap-Rate Properties Better Investments?

In this article, the authors explore whether properties with higher cap rates have better investment performance than those with low cap rates. Using market-adjusted cap rates to classify individual properties, they find evidence of a strong value effect in real estate: High-cap-rate properties exhibit higher returns, outperform on a risk-adjusted basis, and should be preferred by investors. The value effect is consistent across property types, persistent over the cycle, statistically significant, and very large in economic terms. Although the underlying dynamics vary somewhat across property types (especially apartments), the better performance of high-cap-rate (i.e., value) properties appears nearly ubiquitous.

Shareholder Activism in REITs: Shareholder Activism in REITs

Conventional wisdom suggests that shareholder activism in REITs is less prevalent than in other (non‐REIT) public firms because of stronger barriers to hostile takeovers and potentially less undervaluation. Our results, however, suggest that the conventional wisdom does not hold. Specifically, we find that in 2006–2015, Equity REITs (EREITs) are as likely to be targeted by shareholder activists as non‐EREITs. We also find that shareholder campaign characteristics and determinants, as well as their value consequences, appear similar for EREITs and non‐EREITs. Given that this is the first study to examine shareholder activism in REITs, we raise several questions for future research.

Real Estate Fund Openings and Cannibalization

This paper examines the trade-offs in launching new real estate funds, specifically open-end, direct-property funds. This investment vehicle, which is designed to provide the risk-return benefits of private market real estate, is available to retail investors in a number of countries. At the same time, these funds are also subject to liquidity risk, because they hold an inherently illiquid asset in an open-end structure. This format presents fund-family managers with unique challenges, particularly with the decision to open new funds. The data consists of 2,127 German fund openings across 76 fund families in 12 asset classes over the 1992-2010 period. Including a wide range of asset classes allows for a comparison between real estate and other investment objectives. We find a substantial cannibalization effect across the existing real estate funds of a family, while we note the opposite effect – i.e., flows into existing funds increase following a fund opening within the same objective – for all other asset classes. Our analysis of fund opening determinants shows that inflows mitigate the cannibalization risk for new real estate funds. Additional evidence highlights the role of scale and scope economies in real estate fund openings. Overall, the results provide new insights into the relatively large size and small number of real estate funds when compared to mutual funds dedicated to other investment objectives.