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REITs, Underlying Property Markets and Liquidity: A Firm Level Analysis

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  • David Downs
  • Bing Zhu

Abstract

This paper examines the impact of underlying property market liquidity on the liquidity of publicly traded REIT shares. Our analysis measures firm-level exposure to local, direct real estate market liquidity using the property allocation of each REIT. The findings show that property market liquidity can causally influence the liquidity of real estate securities. This is especially true during the crisis period, which confirms with the notion that illiquidity is transmitted from direct to indirect property markets. The results also reveal that the liquidity of a firm’s assets can affect the liquidity of financial claims on the assets. The corporate investment decision, including the selection of a geographic market, can affect stock liquidity. Furthermore, we find that the sensitivity to underlying asset liquidity changes with the firm’s credit constraint and investment opportunities. Small REITs, REITs with a lower cash interest coverage ratio, and REITs with a higher book-to-market ratio might choose to invest in more liquid property markets to improve their stock liquidity. Finally, we find that underlying asset liquidity is associated with REIT values.

Suggested Citation

  • David Downs & Bing Zhu, 2019. "REITs, Underlying Property Markets and Liquidity: A Firm Level Analysis," ERES eres2019_239, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2019_239
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2019-239
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    Cited by:

    1. Thomas Paul & Thomas Walther & André Küster-Simic, 2022. "Empirical analysis of the illiquidity premia of German real estate securities," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(2), pages 203-260, June.
    2. David C. Ling & Chongyu Wang & Tingyu Zhou, 2022. "Asset productivity, local information diffusion, and commercial real estate returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(1), pages 89-121, March.

    More about this item

    Keywords

    Geographic asset location; Liquidity; real estate returns;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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