Massimo Biasin

Effects of Regulatory and Market Constraints on the Capital Structure and Share Value of REITs: Evidence from the Italian Market

In contrast to the US experience, most international (European) real estate investments trusts (REITs) are subject to prudential regulation. This paper investigates the effects of prudential regulation on capital structures and consequently, the REIT share values of major legal and market constraints (i.e. leverage limitations, market discount on net asset value (NAV), tax controls) that affect non-US REITs. Italian market data are used for an empirical analysis. Our hypothesis is that in a constrained environment, the effects on share price significantly depend on the adopted valuation perspective, i.e. if shares are valued by following a NAV or a financial approach. The logic for this hypothesis is that the two valuation methodologies perceive leverage and implied financial risk differently. In particular, we argue that NAV valuation techniques incentivise REITs to maximize leverage regardless of the financial theory which indicates a contrasting impact of debt on the market value of shares. Differences in financial risk perception could also partially explain market price discounts on NAVs.The empirical results seem to support these expectations. Almost all Italian REITs tend to increase debt ratios over time. NAV discounts are significantly related to leverage. The discount effect is largely attributable to NAV increases that result from rising debt levels. On the contrary, share market prices tend to be independent from leverage. The latter result may indicate that the classic capital theory applies and current debt ratios do not imply bankruptcy risk. The results have significant policy implications in terms of an optimal regulatory design.

The German Cooperative Banks. An Economic Overview

Cooperative banking has a long and well established tradition in German speaking countries and in Germany in particular.

The effect of financial structure on net operating income: evidence from the European REITs market

The availability and use of credit have increased significantly over time due to economic growth and development, stronger institutional structures, increased financial innovation and integration, as well as firm-level considerations. Although many firms and households have delevered their balance sheets in response to the recent financial crisis, many governments and financial firms, and especially public real estate firms, continue to maintain significant levels of debt. This raised a lot of interest among academic on the determinants of public real estate firms’ capital structure choice. In fact, some recent research has provided evidence on the consistency of U.S. REIT capital structure choices against existing theories of optimal capital structure (e.g., Harrison et al., 2011). However, empirical evidence on the effect of financial structure on net operating income is still inconclusive, especially with respect to the European market. REITs and REIF are quite unique as their performance can be disentangled in two main components (current and capital gains component). However, what determines the dynamic of those two components and how it affects REITs/REIFs capital structure is still an open question. This paper aims to fill this gap. Precisely, we will first investigate the dynamic of profitability to analyze which component has been the most variable in the years before and after the crisis, which REITs/REIFs institutional features affect this dynamic (e.g. portfolio characteristics), and whether an increase of current income volatility leads capital gains volatility or vice versa. More importantly, we will test empirically the effect of financial leverage and debt composition on the two performance components.The results of this research will also have important implications for lenders of public real estate entities because we will shed light on the winning policy of banks (i.e. those who bet on the asset or income flows).

The German Cooperative Banking System: Volksbanken and Raiffeisenbanken

The German cooperative banks, namely the Raiffeisenbanken and Volksbanken and their central institutions, linked together in the so called Finanzverbund, define the “third pillar” of the German banking system beside the large commercial banks (also known as Grossbanken like Deutsche Bank, Dresdner Bank, Commerzbank and HypoVereinsbank, recently merged with the Italian Unicredit Banking Group) and the savings banks’ network (the so called Sparkassen and Landesbanken). Given a general overview of the size and structure of the German cooperative banking market, the present analysis focuses on the institutional framework of the cooperative system, both on the associative and entrepreneurship level, considering its legal and operational peculiarities. The chapter further investigates the network strategies and the business relations of and within the Raiffeisen and Volksbanken sector, taking into consideration the governance structure of the (first and second level) bank entities. This is in order to highlight the capability of the German mutual banks to act as an Allfinanz-banking group and not as a loose collection of individual financial intermediaries by preserving the statutory independence of the single first level bank entity.

THE PERFORMANCE ATTRIBUTION OF THE ITALIAN REAL ESTATE FUNDS: THE ROLE OF INCOME RETURN AND CAPITAL GROWTH

The performance of real estate funds is mainly influenced by the inflows and outflows during the life of the fund and by the value changes of the real estate properties (Cervone, 2006). Following international standards (CFA Institute, 2009; IPD, 2008), the overall performance of the real estate market can therefore be attributed to the appreciation return and/or the income return. The role of each source of the performance of a real estate investment fund depends on the characteristics of the funds and the market (Baum and Devaney, 2008). Investorsi perception of the two performance sources could be different on the basis of the assetsi liquidity and the debt structure of the funds (Young et al., 1995). Generally, the rent income component, under certain conditions, is the less relevant for the institutional investors that manage a diversified portfolio following a medium-long term strategy. (Lee and Stevenson, 2005). The Italian property funds market has shown an enormous growth over the past few years, however, little is known about the key elements of the property funds performance. The paper considers the Italian market for the last decade and analyzes the annual reports of all public real estate funds, separating the appreciation return from the income return. By considering a wide period of time, the paper also evaluates if the role of income return in respect to the overall performance is influenced by some characteristics of the fund (i.e. asset diversification, concentration, leverage, etc.). The obtained results would be useful for the regulators and for the managing companies (SGR) as well, due to the lack of information about the performance componentsi dynamics for the Italian property fundsi industry.