Long‐run price behaviour of equity REITs: become more like common stocks after the early 1990s?

Abstract

Purpose

The US real estate investment trust (REIT) market experienced a structural change in the early 1990s. This paper aims to examine the following two issues: is the equity REIT market movement positively linked with the stock market movement in the long‐run? If so, how does the long‐run relation between the two markets change after the early 1990s?

Design/methodology/approach

This paper examines the long‐run relation between REIT prices and common stock prices within a four‐price system, i.e., REIT prices, common stock prices, bond prices, and private real estate prices, for two sub‐periods: 1978‐1993 and 1994‐2008. This study uses the more advanced Johansen procedure, which is more robust than the Engle‐Granger procedure, to test the co‐integrated relation.

Findings

The results show that REITs behave like common stocks during the earlier 1978‐1993 sub‐period. In contrast, REITs become less like common stock and more like private real estate after the early 1990s structural change. These results are at odds with the conclusion of Glascock et al., who examine the relationship between REITs and common stocks within a bi‐variate system with the Engle‐Granger procedure.

Originality/value

The paper, as far as the authors are aware, is the first study focusing on the long‐run relation between REIT prices and other asset prices within a multi‐price system. With a more complete price system and a more robust estimation method, this study is the first to document formally that the impressive growth and maturation of the REIT market since the early 1990s has made REITs less like common stocks and more like private real estate in the long‐run. The immediate implication is that REITs are capable of providing investors, such as immature defined benefit pension plans, real estate exposures in the long‐run.

Citation

Lee, M. and Chiang, K. (2010), "Long‐run price behaviour of equity REITs: become more like common stocks after the early 1990s?", Journal of Property Investment & Finance, Vol. 28 No. 6, pp. 454-465. https://doi.org/10.1108/14635781011080302