Italian Public REITs' Governance Structure and NAV Discount

Italian Real Estate Investment Trusts (REITs) are closed-end legal entities structured in the form of investment funds with finite life, externally managed by a management company. Retail REITs are subject to prudential and tax regulation aimed, respectively, to protect and favour retail investors. Market evidence shows that public REITs typically trade at (deep) discount on NAV figures. The intermediation model has severe agency implications and conflicts of interest issues. In particular, retail investors seem to have little control over managers due to the externally management mechanism. In order to improve investorsí governance capability, mandatory provision of a shareholdersí meeting in the article of association of newly established REITs has recently been introduced by regulation. This rule aims to limit managersí opportunistic behaviour and to insure higher performance discipline. The research objective of the paper is to investigate the effects of the (Italian) REITs governance and intermediation structure on market prices discount relative to NAV figures. It first investigates the effects of the new REITsí governance provisions by analyzing the correlation between investorsí control over managers and sharesí market price discount relative to NAV. The hypothesis is that (potential) higher control (i.e. the shareholdersí meeting provision) reduces agency costs having a positive price impact. This also due to market discipline in terms of potential takeovers of poorly managed REITs. This incentive does not affect traditional REITs not having shareholdersí control mechanisms. At the second stage, the NAV discount may be influenced by other legal and economic features of REITs, like leverage and finite life of the closed-end investment vehicle as well as mandatory listing. The analysis controls for these characteristics in order to investigate how the institutional framework affects market pricesí path.