Multiple Arbitrage: Evidence from International Real Estate Markets

Divergences between public and private market valuations provide potential arbitrage opportunities. We develop a model in which the investment decisions of public companies depend on the valuation gap between public and private markets. Our model predicts that public companies finance growth externally by raising capital, debt and equity, when public market valuations exceed private market valuations in order to realize shareholder value gains. We empirically test our model’s predictions using a global sample of 400 REITs and REOCs. We argue that the real estate industry is particularly well suited for this analysis due to its transparency, as well as the high number of private market valuations in general, and at the company level. In particular we examine: 1) whether public real estate companies exploit valuation gaps between public and private markets through external growth (i.e., by raising equity and debt to expand their portfolios), and 2) whether these externally financed expansions result in shareholder value gains.