REVIEW ARTICLES

Editor
David M. Harrison
Texas Tech University
Rawls College of Business
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david.m.harrison@ttu.edu
This section of the Journal of Real Estate Literature publishes quality review articles
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that summarize, review and synthesize the leading areas of research in real estate. The
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Karen M. Gibler (20122013)
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Cliff Lipscomb (20122017)
Greenfield Advisors

Joseph Ooi (20122014)

National University of Singapore
James D. Shilling (20122015)
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Robert A. Simons (20122014)
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C.F. Sirmans (20122015)
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G. Stacy Sirmans (20122015)
Florida State University
V. Carlos Slawson (20122014)
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Brent C. Smith (20122013)
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Abdullah Yavas (20122015)
University of Wisconsin

195

50 YEARS OF REAL ESTATE INVESTMENT

TRUSTS: AN INTERNATIONAL EXAMINATION
THE RISE AND PERFORMANCE OF REITS

OF

Dirk Brounen
Tilburg University

Sjoerd de Koning
Boston Consulting Group

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

The year 2010 is likely to go into the economic history books as a year in which
fragile signs of economic recovery and great uncertainty among investors triggered a
new wave of financial regulations, like Basel III and Solvency II. Setting stricter
standards that are designed to enhance market transparency and reduce the risks taken
by market actors are regaining popularity. The year 2010, however, was also the 50
year anniversary of the Real Estate Investment Trust (REIT) Act of 1960, a financial
tax regulation that fueled the development of the public real estate market. Like many
of the current regulations, this REIT standard was designed to reduce investment risks
and to amplify the transparency of this investment industry. But this 50 year REIT
anniversary passed almost without notice or celebration. This is unfortunate, since the
REIT industry has matured, both in size, volume, and experience. Hence, we take this
opportunity to look back at these five decades of REIT history, and analyze the
financial 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 passed
as an unrelated side piece to a larger change in tax legislation (Graff, 2001). The taxexempt status of REITs was supposed to suit investors as a structure that would allow
them to invest in large, diversified portfolios of real estate combined with the liquidity
of the public market. However, the severe restrictions REITs faced in the operations
of their real estate portfolios prevented them from growing into a major industry. The
Tax Reform Act of 1986 loosened these restrictions and formed the basis of the REIT
boom in the 1990s that would place the REIT industry in a lead role as real estate
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developed into the third most important asset class next to stocks and bonds. During
the past decade, REITs have steadily grown in size and importance around the world
and today the value of the listed real estate investment universe is more than $1
trillion.
Despite the rich history and significant investor interest that REITs enjoy, the sector
is much less understood than other equity sectors. Fundamentally, academics and
investors have questioned whether they should view REITs simply as listed vehicles
that provide access to returns from their underlying property portfolio, or whether
REITs are an integral part of the broader capital markets and their performance should
be judged from the perspective of an equity market index. Studies examining this
matter have produced mixed results, although it has become evident that REIT returns
are not just a simple reflection of the income return and capital appreciation of their
properties.
In this paper, we offer a comprehensive overview of the history of the REIT vehicle
within different parts of the world. Apart from looking back at important landmarks
in REIT history, we discuss the current size and composition of the international REIT
market. We conclude the paper by analyzing the cross-section of returns of 204
different REITs from Australia, Hong Kong, Japan, Singapore, France, The
Netherlands, United Kingdom, Canada, and the United States for the two most recent
decades. Our paper seeks answers for various questions, among which: What triggered
the evolution of todays REIT industry? And what drives the stock performance of
international REITs?
Our review of REIT history shows the importance of setting the right conditions and
requirements in developing a sizeable REIT industry. Both in the U.S. and beyond,
lobbying organizations and coinciding financial deregulations have been key to the
surge of the REIT markets. The correct alignment of interests between the governing
authorities and the investment communities is a challenging task. When considering
the two most recent decades of REIT stock performance for the nine largest REIT
markets in the world, we find that REITs have offered a modest outperformance,
combined with a moderate systematic risk profile. When analyzing the cross-section
of 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 risk
increases with financial leverage. Regarding the stock outperformance of the past
decade, we find that alpha has been highest in Europe, and related positively to firm
size, 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 as
stocks and bonds (Graff, 2001). The Real Estate Investment Trust Act of 1960 was
adopted after pressure from Wall Street investment banks that were looking for new,
profitable investment products to satisfy investor appetite during one of the greatest
bull markets in U.S. history (Graff, 2001). Interestingly, the Act was not passed as a
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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 legislators
and 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 of
commercial real estate. The tax-exempt status that REITs enjoy made it an attractive
legal structure for real estate companies, although the listed entities do experience a
number of restrictions in their operations and policies. These restrictions have been
eased in a step-by-step process of modernization that often triggered a boom in the
popularity of the REIT structure. Still today, the requirement to distribute the earnings
from rental income as dividends restrict U.S. REITs in their ability to grow organically
through internally built up cash reserves.
THE EARLY YEARS

Decker (1998) and Graff (2001) note that REITs did enjoy a period of modest
popularity during the 1960s, but failed to grow into a major source of real estate
capital. Misuse of debt financing by a number of REIT managers led to dissolutions
of REITs and investor appetite quickly faded during the 1970s bear markets (Graff,
2001). At the time, the REITs that managed to continue operating exhibited more
characteristics of small-capitalization stocks rather than of private real estate (Gyourko
and 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 years
was the restriction to only passive real estate investments, which prohibited REITs
from managing their own properties. This prevented REITs from evolving into
integrated operating companies, and created agency conflicts between REIT managers
and outside property managers. In 1986, the REIT lobby championed by the National
Association of Real Estate Investment Trusts (NAREIT) spotted an opportunity as the
U.S. Congress was preparing new legislation on real estate taxation in what would
become the Tax Reform Act of 1986. A number of REIT-related amendments
packaged as the Real Estate Investment Trust Modernization Act was adopted. This
legislation 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 tax
regime that has permitted the explosive growth of the REIT industry in the 1990s and
to REITs becoming real operating companies. Nevertheless, it would take a few years
after the 1986 legislation before the REIT industry would really experience explosive
growth. 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 developers
were left with highly leveraged properties that could not be refinanced. A surge in
mortgage defaults triggered by the collapse in real estate prices in the early 1990s
further added pressure on real estate companies to seek new sources of capital to

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strengthen their balance sheets. Additionally, tougher risk-based criteria for insurance
companies in 1993 classified most commercial mortgages as higher-risk fixed-income
investments for reserve requirement purposes, a development that made real estate
debt an unattractive investment for insurance companies. As a result, private real estate
companies faced the inability to refinance their debt, and in the meanwhile needed to
avoid any asset liquidations in the light of depressed real estate prices. As an
alternative, these companies were forced to consider cheap equity capital infusion, as
REIT valuations surprisingly surged in 1991 despite the collapse of real estate prices.
Triggered by the $128 million Kimco initial public offering (IPO) in November 1990
and the $330 million Taubman IPO a year later, many large real estate companies
chose to convert to a REIT structure. Low interest rates and bond yields created a
window of opportunity for real estate companies to enter the public equity markets
and equip themselves with additional capital to take advantage of the depressed real
estate prices. In the 19931994 IPO boom, 95 private U.S. real estate companies
went public as REITs, raising $16.5 billion in equity.
As the REIT industry finally developed into an industry of significant size, a second
major development was needed to ensure that capital markets would be willing and
able to continue to facilitate the expansion of REIT equity offerings. In 1974, the
pension fund sector experienced a major change with the enactment of the Employee
Retirement Income Security Act (ERISA). The Act put pressure on pension plan
managers 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 of
underperformance. In order to weaken legal restraints on investments in REITs by
pension plans, an attachment to the Omnibus Budget Reconciliation Act (OBRA) of
1993 created a distinction in shareholder recognition to circumvent shareholder
diversification requirements in the REIT legislation. In the following four years,
pension plan investments in REITs would still remain modest, but other institutional
investors like mutual funds and insurance companies massively turned to REITs as a
real estate investment, thereby securing investor demand for the REIT equity capital
boom between 1993 and 1997 (Parsons, 1998).
Despite the promise from real estate managers that large capitalizations would enable
REITs to reflect the investment characteristics of underlying properties and create
scale advantages and liquidity, 1998 proved to be a disastrous year for the U.S. REIT
industry. With no apparent change in the valuation of the underlying properties,
suddenly the premiums to net asset value (NAV) disappeared throughout the REIT
industry. The NAREIT index lost 22% in that year and ended 1999 at an overall
discount to NAV of 18%. Investor concerns about the market fundamentals of the
properties caused them to be more hesitant to accept the continuous equity offering
from REITs. Apart from that, the decline of the REIT industry coincided with the
build-up of the dotcom bubble. It is widely believed that momentum investors who
pulled their money from the real estate sector did so to invest in the upcoming
technology stocks in their belief that this would create higher returns. The sudden
understanding that broader capital market trends could influence the performance of
REITs emphasized a fundamental question about listed real estate: Are real estate

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stocks a reflection of the underlying property portfolio, or are they a part of the
broader 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 a
number of corporate scandals, the 2002 Sarbanes-Oxley Act enforced strict provisions
on 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 investment
class and thus tried to leave the turbulent times behind. The real estate crash of 2008
did put a lot of REITs into jeopardy, although the real pain lay with mortgage debt
and related complex securities such as commercial mortgage-backed securities
(CMBS) and collateralized debt obligations (CDOs). The real estate downturn resulted
in a widespread global economic crisis, which made the cost of debt surge and
reinstated real estate prices to lower levels.
REITs ON TOUR

Following on the success of the U.S. REIT industry, countries all over the world have
instituted similar real estate structures in an attempt to facilitate the development of
their domestic real estate industries. The first country to pick up on the tax-exempt
status of real estate companies was the Netherlands, which in 1969 instituted the
Fiscale Beleggings Instelling or FBI (EPRA, 2009). Although a number of other
countries instituted REIT-like structures in the following decades, it would not be until
the early 2000s that several countries in Asia turned to the REIT as a way to inject
liquidity and new capital into the real estate sector that suffered heavily during the
Asian financial crisis of 1997. Most European countries have introduced REITs in
their legislative regime only quite recently and the success of these structures therefore
largely remains a question to be answered.
In following section, we first consider the countries that adopted REIT-like structures
in the 30 years after the introduction of the U.S. REIT. After that, we will consider
two important regional developments that greatly added to the widespread adoption
and popularity of the REIT structure; the Asian REIT market development in the early
2000s, 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 in
the U.S. in 1960. The countrys history of affinity with real estate and pressure from
its large pension funds to institute a beneficial legal structure for holding real estate
made the Dutch legislator pay particular attention to the developments that were taking

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place in the U.S. Apart from the Netherlands, in Europe only Belgium and Greece
adopted REIT structures before the turn of the century. Belgiums SICAFI was
introduced in 1995 (Societe dinvestissement Immobilie`re a` Capital Fixe) as an
attempt to promote real estate investments in a relatively safe, tax beneficial
environment. SICAFIs are listed, closed-end funds with a corporate structure. Exhibit
1 provides an overview of REIT-like structures around the world.
Another early adopter of the REIT structure has been Australia, which has had listed
property trusts (LPTs) since 1971. General Property Trust (GPT) is the first Australian
LPT to be listed on the countrys stock exchange. The country also allows for private
REITs, known as unlisted property trusts. Since March 2008, the legislation on LPTs
has been amended and the trusts have been renamed Australian REITs (A-REITs), in
line 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 market
capitalization of $43 billion, thus comprising 12.2% of the global REIT market
(EPRA, 2009). The maturation of the Australian REIT market has allowed these
entities to enjoy a head start in the internationalization of the REIT industry, and
many 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 the
REIT explosions in Asia and Europe (EPRA, 2009). The motives for adopting REIT
regimes have traditionally been in line with those mentioned in the U.S., particularly
as a vehicle to promote real estate investments. Nevertheless, the size of the REIT
industry 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 and

Malaysia, the REIT did not receive significant attention on the Asian continent until
the turn of the century. At that time, several supply and demand side factors came
together and caused the emergence of REITs in a number of Asian countries.
Interestingly, real estate companies as well as non-real estate corporations and
financial institutions together pushed for the introduction of REITs. In Japan and South
Korea, banks used REITs in an attempt to recapitalize their balance sheets on the
back of an increasing percentage of non-performing loans. In Singapore, REIT stocks
traded at significant premiums to NAV, which made it an interesting vehicle for real
estate 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 their
ownership of real estate. An example is Japan Airlines Corporations, which sold its
central Tokyo headquarters to a J-REIT run by Nomura Real Estate for JPY 65 billion
in 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 like
Japan and Singapore also added pressure on investors to seek higher-yielding financial
products. With most of the Asian economies recovering from a recession, investing
in REITs in the early 2000s provided an opportunity to gain exposure to real estate
with much upside as indices would gravitate upward again.
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Exhibit 1
REIT Regimes around the World
Country

Legal Name

Incepted

# REITs

Leverage Restriction y / n

Profit Distribution

Belgium

SICAFI

1995

Finland

FINNISH REIT

2009

14

Yes, 65% of assets

80% of net income

Yes, 80% of assets

90% of net income

France

SIIC

2003

46

Yes, thin capitalization rules

85% of tax-exempt profits, 50% of

capital gains

Germany

G-REIT

2007

Yes, equity must equal at least 45%

of total assets

90% of net income

REIC

1999

Yes, 50% of assets

35% of net income

Israel

REIF

2006

Yes, 60% of assets

90% of net income plus

depreciation

Italy

SIIQ

2007

Yes

85% of income derived from real

estate rental or leasing

Lithuania

REIT

2008

Yes, 75% of net assets

No requirements

50 YEARS

Luxembourg

SIF

2007

No

No requirements

OF

The Netherlands

FBI

1969

Yes, 60% of property

100% of net income

Spain

SOCIMI

2009

Yes, 70% leverage ratio

90% of income derived from real

estate rental or leasing

Turkey

REIC

1995

13

Yes, short-term credits limited to

three times NAV

20% minimum as first dividend

ratio

U.K.

UK-REIT

2007

21

Yes, interest cover test

90% of tax-exempt profits

Unlimited, subject to general thin

capitalization rules

Typically 100% of trusts net

income

Europe

108
Unit Trust

1971

66

Dubai

REIT

2006

Yes, 70% of net assets

80% of net income

Hong Kong

HK-REIT

2003

Yes, 45% of gross assets

90% of annual net income

India

REMF

2008

Yes, 20% of net assets

As per offer document & SEBI

guidelines

203

Australia

REAL ESTATE INVESTMENT TRUSTS

Greece

204

Country
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

No

No requirements

Pakistan

Pakistan REITs

2008

Yes, must not exceed 60% of REIT

90% of net income

Philippines

TBA

Pending

Yes, 35% of property

90% of net income

Singapore

S-REIT

1999

20

Yes, 35% (this leverage limit may be

increased to 60%)

90% of net income

South Korea

REIC

2001

Yes, max debt-to-equity ratio of 2:1

90% of net income

Taiwan

REIT / REAT

2003

Yes, 35% leverage ratio

Pursuant to the REIT contract

Thailand

PFPO

1992

Yes, borrowing is prohibited

90% of net income

Yes, 30% of assets

Capital gain must be reinvested

Asia and Oceania

South Africa

# REITs

Leverage Restriction y / n

Profit Distribution

175
Property Unit Trust

2002

Africa

5
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 of
inception, the number of REIT trading at year-end 2010, and whether or not restriction apply regarding corporate debt and dividend policies.

REAL ESTATE LITERATURE

Incepted

OF

Legal Name

JOURNAL

VOLUME 20, NUMBER 2, 2012

Exhibit 1 (continued)
REIT Regimes around the World

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205

In the development of the Asian REIT markets, Japan has been leading with the
introduction of the J-REIT in 2000. The entity was introduced with an amendment to
the Investment Trust and Investment Corporation Law in November 2000 (Investment
Trust Law or ITL). The first two J-REITs, the Office Building Fund of Japan and
the Japan Real Estate Investment Corporation, were listed on the Tokyo Stock
Exchange in November 2001 (Ooi, Newell, and Sing, 2006). As of March 2009, Japan
has 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 it
distributes more than 90% of its accounting profit. Japan set an example that would
be followed by all the Asian countries except South Korea by structuring their REITs
as trusts, much like Australias A-REITs.
Singapore has allowed for real estate funds since May 1999, when the Monetary
Authority of Singapore (MAS) released guidelines that arranged for the possibility of
tax transparency for Singapore real estate companies. It would however take more
than three years before CapitaMall Trust (CMT) listed as the first S-REIT on the
Singapore Exchange in July 2002. Interestingly, an earlier attempt by SingMall
Property Trust (SPT) in October 2001 failed due to undersubscription for its shares.
In December 2002, the Singapore authority loosened the requirements for tax
transparency, most notably by reducing the profit distribution requirement from 100%
to not less than 90% (Ooi, Newell, and Sing, 2006). A further wave of regulatory
changes has been implemented in 2005, in an attempt to further boost the development
of the S-REIT industry. At the end of June 2009, there were 20 S-REITs with a
combined market capitalization of around $12 billion; CMT was still the largest SREIT 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 in
other Asian countries. The REITs did not receive tax transparency and were not
allowed to own property outside of Hong Kong. In 2005, the Code on REITs was
revised. After an initial IPO in December 2004 failed due to a legal challenge from
a tenant, in November 2005 the first REIT IPO in Hong Kong took place. Link REIT
was 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 of
REITs as closed-ended funds. Legislation has step-by-step been loosened and at the
end of June 2009, Taiwan had 8 REITs with a combined market capitalization of $1.5
billion.
THE EUROPEAN REIT BOOM

With an eye on the success of the REIT adoption in Asia, European policy makers
started considering the options for their own countries. The two strongest motives for
the 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 of
investing 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 estate
companies, makes these companies more competitive, and encourages an efficient
allocation of capital (Campbell and Sirmans, 2002). Another motive for some
European governments to allow the REIT structure is that it provided an exit
opportunity to their sometimes substantial holdings in real estate. Finally, as the REIT
industry in other countries starts to mature, REITs are expanding internationally and
competing with real estate companies in Europe. The tax disadvantage of European
real estate companies put them in a difficult position to keep up with competitors.
The European widespread adoption of tax beneficial real estate vehicles started with
the implementation of the SIIC (Societes dInvestissements Immobiliers Cotees)
structure in France in 2003. The legislation aimed to allow foncieres, which are French
joint-stock corporations managing real estate assets, to attain conduit status and thus
transform 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 competitive
position with that of non-resident investors to match the tax regime of other European
countries. Second, the French government believed the introduction would enable
them to decrease their budget deficit through the exit tax it would levy on unrealized
capital gains of property companies converting to the SIIC structure. Third, property
companies thought that the persistent discount to NAVs would evaporate as they
converted into tax transparent legal entities. After introduction in 2003, the legislation
on SIICs has been amended several times and today the French REIT-like structure
is a particularly liberal competitive structure within the domain of European tax
beneficial real estate company structures. The SIIC has become an extremely
successful vehicle, at the end of June 2009 there were 46 SIICs with a combined
market capitalization of $40 billion. The French-Dutch real estate giant UnibailRodamco is by far the largest SIIC, which at that time had a market capitalization of
almost $11 billion.
It took almost four years and a tremendous amount of lobbying from industry groups
before 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 a
provision in the UK Finance Act of 2006. Immediately, nine real estate companies
elected to become REITs, and many followed soon after. UK-REITs originally were
closed-ended companies that had to distribute 90% of their income profits in order to
receive the tax advantages associated with the REIT structure. As European countries
started to implement REIT structures, the Netherlands continued the trend of ever
competitive tax legislation by loosening its FBI regime. In response, the UK
announced a large overhaul of its REIT regime. The Corporation Tax Act of 2010
provides broad simplifications and liberalization of the provisions dealing with UKREITs. At the end of June 2009, the UK had 21 REITs with a combined market
capitalization 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 distribute
most 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 that

holding residential property built before January 1, 2007 is not allowed. The positive
difference is that capital gains tax, which is normally 40% in Germany, is cut in half
for property sales to G-REITs, making it a very attractive structure for buyers
(Busching, 2007).
After the major European countries implemented their REIT regimes, other
neighboring countries were quick to follow. Italy instituted its Societa`
dIntermediazione Immobiliari Quotate (SIIQ) in July 2007, although only one
company has opted for this corporate type REIT structure so far. In response to the
distressed real estate market in Spain, the countrys government is working on
legislation to implement Sociedades Cotizadas de Inversion en el Mercado
Inmobiliario (SOCIMIS). Unlike other European REIT structures, SOCIMIS do not
enjoy 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 listed
on the GPR 250 Index, the GPR 250 Europe Index, and the EPRA REIT Indices. By
including only those REITs that are part of these indices, we neglect the smaller
subsection of the REIT industry. These stocks are expected to be less liquid, and
therefore may distort the empirical research on REIT returns as their stocks are not
as informationally efficient as those of larger REITs. For the Asian continent, we
gather data from the four largest REIT markets: Japan, Singapore, Australia, and Hong
Kong. The European continent includes data from REITs in the U.K., France, and the
Netherlands. The North American REIT data come from Canada and the U.S. Exhibit
2 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 data
for 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 in
the interpretation of the test results from the early time periods. Using annual balance
sheet data from Standard & Poors Capital IQ, we construct profiles of the property
type and geographic diversification of the REITs. When the data are not available in
this database, we supplement with annual report data from the company websites.
Also, we construct a measure of the degree of property development by dividing the
amount of property under development by the total property portfolio reported on a
companys balance sheet, as proposed by Brounen, Eichholtz, and Kanters (2000).
Exhibit 2 shows that Hong Kong REITs are, on average, among the oldest in the
world. In fact, the Hong Kong REITs in our sample also stand out with respect to
leverage, which is remarkably low in Hong Kong, and likely due to the fact that these
REITs are mostly specialized in one type of real estate. The long track record, but
more so the vast size of Hong Kong REITs, is key to the high correlation between
their REITs and the contemporaneous common stock market. In Hong Kong, the real
estate market is a significant portion of the national stock market. When comparing

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Debt Ratio
(%)

Age
(Years)

Type
Focused (%)

Regionally
Focused (%)

Development
Ratio (%)

OF

Size
(US$ bn)

Return
(%)

Risk
(Std. Dev.)

Correlation
with 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 over
total assets), firm age, whether firms have focused their asset portfolio across property types and geographical regions, the proportion of assets
committed to property development, the annual stock returns, standard deviations and correlation with the local common stock market. We list the
averages 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 of
the asset portfolio is focused in one property type or region, we consider the REIT as focused. The statistics in this table indicate the portion of
firms in each national sample, that qualified as focused according to this standard.

REAL ESTATE LITERATURE

VOLUME 20, NUMBER 2, 2012

Exhibit 2
Summary Statistics of the International REIT Samples

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Exhibit 3
REIT 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 the
common stock market is much weaker. Overall it seems that the dispersion of REIT
characteristics is rather vast when comparing across markets. For instance, debt ratios
vary between 21.0% (Hong Kong) and 61.5% (Canada), firm ages range from 5.8
years (Singapore) to 38.1 years (U.K.), and average annualized returns hover between
0.84% (the Netherlands) and 16.08% (Singapore). Regional focus of the property
portfolio is high in the U.K. and Japan, while REITs in Australia and Singapore are
mostly diversifying their properties across various real estate types.
The sample includes 41 European REITs, which makes it the smallest of the three
regional 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 only
very recently been implemented and most of these companies operated as common
property companies before. Caution should thus be taken when drawing conclusions
from 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 from
Singapore. Similar to the European sample, a part of the return data are from periods
during which these companies were not legally organized as REITs yet, and caution
is again warranted in the interpretation of the results. The North American part of the
sample contains 106 companies: 91 are U.S. REITs and 15 are Canadian REITs. This
subset is by far the largest part of the sample; U.S. REITs have been operating within
the legal context of REITs for a long period. Exhibit 3 shows the evolution of the
sum aggregated market capitalization of the REITs in our sample.

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We analyze the stock performance of our sampled REITs using various asset pricing
model specifications. We start by applying Sharpes (1964) conventional CAPM
analysis:
Rit R it it[Rmt Rt] ,

(1)

where we relate the excess stock return of REIT i over period t over the risk-free rate
of return to excess national market return for the corresponding period. We use
national stock market indices as a proxy for the unobservable market index, and the
one month Treasury bill rates as the risk-free rate of return.
To assess the robustness of our estimation of the stock outperformance () and loading
on systematic risk (), we also run a three-factor model specification:
Rit R it it[Rmt Rt] it HML it DIV .

(2)

In this model, we extend the single factor specification by including measures for
value (HML) and dividend effects (DIV). In line with Fama and French (1992), we
calculate HML as the return differences between top and bottom portfolio ranked
book-to-market ratios, while DIV is the differences in return of the top versus bottom
dividend paying firms.1
Once the REIT alphas and betas are estimated as indicators of historic
outperformance and risk, we continue our empirical analysis by explaining the crosssectional distribution of these indicators. For this exercise, we consistently relate both
alpha and beta in a stepwise analysis to three sets of factors:
it ci 1Region 2FirmCharacteristics 3PortfolioStrategy .

(3A)

it ci 1Region 2FirmCharacteristics 3PortfolioStrategy .

(3B)

First, we relate our firm estimates for alpha (beta) to a set of regional dummies. Here
we estimate Europe and Asia and use North America as reference group. We then
expand 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 as
important control variables that have proven to be of importance to both the return
and risk profile of REITs. Finally, we add three indicators for portfolio strategy into
this cross-sectional OLS model. For each firm, we measure the level of property type
focus of the asset portfolio, the regional distribution of their assets, and the extent to
which the REIT is involved in property development activities. Following Benefield,
Anderson, and Zumpano (2009) and Ambrose and Linneman (2001), we classify
REITs as type-focused if at least 75% of their property portfolio is invested in a
single industry. In that case, the type focus type will be one, and zero otherwise. In
line with earlier work by Boer, Brounen, and Op t Veld (2005), we also quantify the
regional focus of property portfolios by labeling REITs that invest 75% or more of
property 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 consider
the level of corporate involvement in property development activities as a strategic
VOLUME 20, NUMBER 2, 2012

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choice of REITs. Like Brounen, Eichholtz, and Kanters (2000), we expect that the
higher risk profile of development projects may affect the beta of firms. By combining
all the relevant data of financial statements, we estimate an average development ratio
for each REIT by dividing the book value of their development projects over their
total assets. REITs that have more than 3.7% of their property portfolios invested in
development projects are considered as developing REITs. Again, we use a binary
dummy 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 model
estimations. 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 REIT
sample, the simple CAPM model explains almost 65% of the return variations over
time, whereas in the European and U.S. markets, the model fit is close to 37%. This
difference is most likely due to the fact that in many Asian markets the REIT industry
represents a relatively large proportion of the overall financial market. Hence, REIT
returns, by definition, relate more strongly to the movements of the overall market.
The sensitivity to overall stock market movement, the systematic risk (beta), of Asian
REITs is also highest. But in all three markets, the risk estimates indicate that REITs
are 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 positive
in all three markets. The Asian REITs have offered the highest outperformance, but
in all markets these average alphas lack statistical significance. This may be due to
the inclusion of the 20072010 period, a time when the real estate sector suffered a
tremendous blow and went out of sync with the broader stock market.
The distribution of REIT alphas is also graphically presented in Exhibit 5; the vast
majority of individual alphas are indeed positive and a larger portion of the highest
alphas is in fact Asian. To assess the robustness of the results, we also repeat the
analysis for the sub-period 20002007. Panel B in Exhibit 4 shows that sub-periods
can result in egregious alphas, an effect that is apparent in all the countries. While
this period was indeed one of a global real estate boom, the results may be misleading
as the R2 and F-statistic are often quite low. This hints towards a misfit of the market
model with the REIT returns. This makes it more interesting for us to test the returns
using a multi-factor model specification.
Panel B of Exhibit 4 is an overview of the estimates of the three-factor model on the
non-weighted country REIT indices. The analysis was conducted on the 19902007
data, thereby excluding the extreme return statistics observed during the recent
financial crisis. The results show that the two additional explanatory variables add
only minor improvements to the predictive power of the model, as R2 in most cases
has improved only by a few percentage points. The market index remains the most
prominent explanatory variable in the returns of REITs, with all of the sensitivity

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Exhibit 4
REIT Asset Pricing Estimations
Mean

Std. Dev.

Min.

Max.

R2

Panel A: CAPM
Full sample: 19902010
Alpha
Europe
Asia and Oceania
North America

0.080
0.870
0.480

0.49%
0.74%
0.74%

1.620
1.230
1.450

0.940
3.310
3.210

Beta
Europe
Asia and Oceania
North America

0.471
0.587
0.492

8.59%
13.68%
11.63%

0.295
0.143
0.138

0.617
0.856
0.797

Sub-sample: 19902000
Alpha
Europe
Asia and Oceania
North America

1.200
1.060
1.120

0.47%
0.76%
0.59%

0.036
0.017
0.903

1.938
3.631
3.411

Beta
Europe
Asia and Oceania
North America

0.480
0.770
0.510

0.18%
0.35%
0.26%

0.212
0.297
0.156

1.020
1.630
1.899

Alpha
Europe
Asia and Oceania
North America

0.090
0.470
0.470

0.55%
0.71%
0.78%

1.480
1.220
1.480

0.970
3.240
3.200

Beta
Europe
Asia and Oceania
North America

0.441
0.826
0.713

8.49%
13.81%
12.23%

0.263
0.144
0.124

0.612
0.871
0.811

(HML)
Europe
Asia and Oceania
North America

0.034
0.136
0.267

7.22%
14.10%
9.79%

0.044
0.009
0.301

0.690
0.228
0.008

(DIV )
Europe
Asia and Oceania
North America

0.072
0.211
0.019

10.06%
14.55%
8.62%

0.042
0.013
0.079

0.122
0.383
0.090

37.23%
64.70%
37.83%

16.09%
35.69%
13.09%

Panel B: Three-factor Model

24.90%
63.65%
39.58%

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

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Exhibit 5
Distribution of REIT Alphas

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

measures ( market) both positive and significant at the 5% level. The book-to-market
effect ( BE/ME) is not evident from this analysis, since both positive and negative
betas 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 significant
results 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. The
four Asian REIT indices are most sensitive to their market index movements, possibly
an 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%, and
0.74%, respectively. Nevertheless, with the exception of Canada, none of the alphas
are significantly different from zero. The French and Dutch REIT indices produce the
lowest market betas (0.396 and 0.363), which may suggest the REITs in these
countries are less dependent on equity market movements and driven more by the
dynamics 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 our
sample period. REIT betas only declined during the high tech boom and bust of the
late 1990s, when stock investors first ignored the low-yielding real estate stocks when
the 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 REIT
returns beyond the common stock averages. This temporal era of sector rotation

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Exhibit 6
Average REIT Betas over Time

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

among investors reduced the coherence between REITs and the stock market, but this
relation 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 and
betas by regressing these on various sets of explanatory variables. There are three
phases in the analysis. We first examine the significance of any regional variations in
REIT performance using continental dummies. In the second phase, we extend the
model by including REIT-specific characteristics: size, leverage, and age. Finally, we
assess the importance of investment strategies within REIT property portfolios by
using measures of the level of property-type diversification, geographic focus, and
property development involvement, again for the individual REITs.
As we move from time series regressions to ordinary regressions, we combine the
sample of 204 REITs in an attempt to satisfy the statistical requirements regarding
sample size. As mentioned in the methodology section, size is measured as the average
market capitalization over the sample time period. Larger REITs may enjoy scale
benefits that allow them to outperform their smaller peers. Size is transformed into
its logarithm in order to overcome issues from the observed heavy right tail in its
original distribution. Leverage is measured as the average debt ratio over the sample
time period. For obvious reasons, leverage impacts the risk/return profile of
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215

companies and thus may influence the risk profile of companies. Age is the third
variable in the first phase of testing. Older companies may have established a more
solid name among investors and thus help facilitate superior returns over newcomers
in the industry.
The third phase of this analysis introduces the three quintessential strategic choices
that REITs make. The level of property-type diversification may tarnish the ability of
REITs to deliver superior returns on the basis of a lack of knowledge of operating in
different real estate segments. As the sample is dominated by specialized REITs, this
group forms the base category in our analysis using dummies to probe the mean
difference between the two groups. The local character of real estate is expected to
drive investors to reward a geographic focus among REITs, inasmuch as engaging in
real estate investing in outside regions would be considered risky. We use the
diversified group as the base category for this analysis. Finally, property development
involves a risky engagement that requires specific expertise, while also potentially
providing REITs with an opportunity to outperform competitors based on their ability
to 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. We
report the results for the analysis of the full sample, as well as the time periods 1990
2000 and 20002007. The predictive power (R2) of the full sample model increases
from 12.1% up to 22.1% as we progress through the three phases of model
specification. Although this is not exceptionally high, the fact that the dependent
variable is in essence a derivative of earlier research steps supports the predictive
power of the model.
The first columns of each output cluster in Exhibit 7 contain the results of the simple
model, which only corrects for regional variations. Obviously, the explanatory power
of this model is weak at best. These initial results indicate that European REITs
underperformed their U.S. peers, but only during the 1990s, when the U.S. REIT
market was blossoming. Since the turn of the millennium, this situation reversed and
European REITs have been performing best. The REITs from Asia and Oceania have
delivered competitive alphas all around. Both during the first and second half of the
sample period, Asian REITs outperformed the U.S. market, but these differences have
never been statistically significant.
When extending this basic regional model with control for REIT-specific
characteristics, we document a vast increase in the model fit. Moreover, we find
consistent proof for a size premium among REITs, with large REITs delivering the
highest 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 evidence
that property type specialization is associated with the highest alphas. These results
are in line with Boer, Brounen, and Op t Veld (2005), and indicate that managing a
REIT 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 REITs
are 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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Region
Europe
Asia and Oceania
REIT Characteristics
Log Size
Leverage
Age
Strategic Choices
Type Specialized

19902000

20002007

II

III

II

III

II

III

0.323
(3.16)

0.187
(1.68)

0.24
(2.03)

0.239
(1.97)

0.19
(1.42)

0.255
(1.82)

0.263
(2.22)

0.361
(2.91)

0.337
(2.57)

0.247
(2.24)

0.273
(2.39)

0.142
(1.13)

0.159
(0.90)

0.114
(0.53)

0.017
(0.07)

0.138
(1.10)

0.053
(0.42)

0.032
(0.16)

0.244
(2.72)

0.304
(3.19)

0.118
(1.09)

0.144
(1.23)

0.400
(4.13)

0.392
(3.80)

0.007
(1.05)

0.005
(0.64)

0.001
(1.30)

0.000
(0.59)

0.001
(0.27)

0.001
(0.43)

0.003
(2.73)

0.002
(1.97)

0.004
(0.28)

0.002
(0.06)

0.001
(0.21)

0.001
(0.48)

0.111
(1.28)

0.034
(0.31)

0.234
(2.19)

Region Specialized

0.188
(1.99)

0.190
(1.64)

0.214
(2.05)

High Development

0.117
(1.06)

0.143
(1.00)

0.221
(1.76)

REAL ESTATE LITERATURE

Full Sample

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VOLUME 20, NUMBER 2, 2012

Exhibit 7
Explaining the Cross-Sectional Variation of REIT Alphas

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

R2
N

II
12.1%

204

18.2%
204

III
22.1%
204

20002007
II

5.4%
146

III
8.3%

146

12.8%
146

II
4.0%

204

17.7%
204

III
19.7%
204

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REAL ESTATE INVESTMENT TRUSTS

Notes: This table gives the results of our cross-section OLS regressions on individual REIT alphas (from the CAPM model). We regress alphas on a
set of regional dummies, firm characteristics, and portfolio strategy indicators. For the regional variation, the North American markets are our
reference 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 is
one if at least 75% of the assets belong to a single property type, and zero otherwise. Region specialized also measures corporate focus, but across
geographic regions, and is one of at least 75% of the assets are located within one region, and zero otherwise. High development is a dummy
variable that indicates whether the ratio between the book value of property development activities and total assets exceeds the national sample
average. The t-statistics are in parentheses below the coefficient estimates.

50 YEARS

19902000

217

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Region
Europe
Asia and Oceania
REIT Characteristics
Log Size
Leverage
Age
Strategic Choices
Type Specialized

19902000

II

III

0.193
(3.45)

0.164
(2.64)

0.178
(2.70)

0.097
(1.58)

0.149
(2.32)

0.161
(2.23)

0.053
(1.05)

20002007
II

III

II

III

0.018
(0.39)

0.013
(0.27)

0.036
(0.72)

0.037
(0.62)

0.019
(0.30)

0.006
(0.05)

0.609
(9.12)

0.459
(6.07)

0.42
(5.21)

0.323
(5.01)

0.365
(5.48)

0.413
(5.30)

0.072
(1.35)

0.043
(1.13)

0.046
(1.12)

0.024
(0.48)

0.045
(0.80)

0.003
(1.90)

0.003
(1.82)

0.004
(1.42)

0.004
(1.06)

0.003
(2.63)

0.003
(2.88)

0.001
(0.60)

0.001
(0.74)

0.002
(3.87)

0.001
(3.81)

0.004
(2.12)

0.004
(1.93)

0.033
(0.46)

0.042
(1.10)

0.043
(0.69)

Region Specialized

0.026
(0.49)

0.028
(0.69)

0.077
(1.38)

High Development

0.038
(0.68)

0.005
(0.09)

0.010
(0.15)

REAL ESTATE LITERATURE

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VOLUME 20, NUMBER 2, 2012

Exhibit 8
Explaining the Cross-Sectional Variation of REIT Betas

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

R2
N

II
11.3%

204

15.5%
204

III
19.3%
204

20002007
II

46.8%
146

56.3%
146

III
57.6%
146

II
17.2%

204

24.2%
204

III
25.6%
204

OF

REAL ESTATE INVESTMENT TRUSTS

Notes: This table gives the results of our cross-section OLS regressions on individual REIT alphas (from the CAPM model). We regress betas on a
set of regional dummies, firm characteristics, and portfolio strategy indicators. For the regional variation, the North American markets are our
reference 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 is
one if at least 75% of the assets belong to a single property type, and zero otherwise. Region specialized also measures corporate focus, but across
geographic regions, and is one of at least 75% of the assets are located within one region, and zero otherwise. High development is a dummy
variable that indicates whether the ratio between the book value of property development activities and total assets exceeds the national sample
average. The t-statistics are in parentheses below the coefficient estimates.

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variation in the systematic risk loadings of REITs. There is a difference in model fit
across the sample periods. It seems that explaining REIT betas was relatively easy
during the 1990s, since only controlling for regional variation would help you
understand almost half of the risk profile of individual REITs. One potential
explanation for this finding is the Asian REIT wave that started at the end of the
1990s. Before the REIT introduction, many Asian real estate investment companies
faced 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 this
simple difference explains most of the early variations.
When taking a closer look at the risk analysis, we find that apart from the regional
variations, REIT leverage is key to REIT betas. The textbook leverage effect also
holds within the REIT industry, with higher systematic risk loadings for the highlylevered REITs. Firm size and age appear less relevant. Although the exposure to
property development seems to increase beta in line with the earlier work of Brounen,
Eichholtz, and Kanters (2000), this relationship lacks statistical power. The
specialization level of the property portfolio also lacks convincing relevance within
the beta analysis.
In conclusion, we find evidence that the return and risk profile of REITs as captured
by market betas is influenced by regional differences and in more modest form by
leverage and portfolio focus. Both among alphas and betas, we still detect traces of
continental variation, which indicates that even after 50 years, the performance of
REITs has not integrated into one truly global real estate sector. Our results indicate
that it is important to study the capital structure of REITs when selecting REITs, as
leverage drives systematic risk upwards. It is also important to knowledgeable about
the portfolios focus across property types. In line with earlier work, we find that
specialized REITs offer the highest stock outperformance.

CONCLUSIONS
REITs have experienced tremendous growth since the passage of the U.S. Real Estate
Investment Trust Act in 1960. The benefits of enjoying a tax-exempt status on the
one hand were offset by the obligation to maintain high dividend payout ratios on the
other. In this setup, REITs provided an opportunity for small investors to access real
estate in a liquid, diversified manner. Nevertheless, it would take a number of
legislative actions to expand the options for REITs to engage in property management
and 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-scale
adoption of REITs by institutional investors like insurance companies, mutual funds,
and pension funds. The massive REIT IPO boom in 1993 was accompanied by
overbuilding, a surge in mortgage defaults, as well as a number of changes in
legislation governing institutional investors that brought REITs to the limelight as
interesting investment vehicles. Ever since, the U.S. REIT industry has gone through
periodic booms and busts, while slowly maturing into a solid industry that has the
size to make it one of largest asset classes.

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Internationally, the expansion of REIT-like structures has taken several decades. While
some countries like the Netherlands were quick to adopt similar tax benefit rules that
promoted investments in real estate companies, the U.S. REIT was not met with
overwhelming enthusiasm on the other side of the ocean. Finally, the 1990s witnessed
the widespread adoption of REITs in Asia that were mostly based on the Australian
example of listed property trusts, a real estate structure that had proven successful
since the 1970s. On the European front, REIT-like structures emerged during the last
decade, with some countries getting into the REIT game so recently that the
implementation of legislation has not even been completed yet.
In the second part of this study, we conducted several empirical analyses using total
return 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 1990
2010 time period; the sample was divided into the 19902000 and 20002007 time
periods to take into account the real estate cycles within these periods.
First, we examined the issue of model specification for analyzing REIT returns. Using
market proxies in a CAPM specification, we found that REITs produce positive
abnormal returns and have outperformed their national indices particularly in 2000
2007. The sensitivity of REITs to tendencies in the broader stock market varies by
country, 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 image
of 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 REIT
returns. We discuss the observed risk-adjusted performance as represented by alpha
and the riskiness of REITs as described by beta from the CAPM analysis by regressing
these on a number of variables. We found that in the full sample and the 20002007
period, alpha is significantly influenced by firm size and that geographically-focused
REITs 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 that
the risk profile of REITs as captured by market betas is influenced by regional
differences and firm leverage. Despite other research claiming a connection between
property development and beta, we did not find proof of a strong link between the
strategic choices of REITs and their risk profiles.

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

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

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

Dirk Brounen, Tilburg University, The Netherlands or d.brounen@uvt.nl.

Sjoerd de Koning, Boston Consulting Group, The Netherlands or deKoning.
Sjoerd@bcg.com.

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