Ex-Ante Predictability of REIT Returns

The Real Estate Investment Trust (REIT) market has become an increasingly important vehicle of alternative investment for equity investors. While existing research examining the cross-section of REIT returns usually employs standard risk factors in the in-sample models, it can only show ex-post predictability of REIT returns. The goal of our paper is to examine the ex-ante predictability of REIT returns (i.e., the ability of investors earning abnormal returns in real time). We employ the out-of-sample methodology of Cooper, Gutierrez, and Marcum (2005), and our findings show that ex-ante predictability of REIT returns is rather weak. For about half of our 19-year sample over the period of 1999 to 2017, the portfolio performances of REIT firms chosen ex-ante do not beat the performances of the FTSE-NAREIT or the CRSP Equal-Weighted index. After adjusting for transaction costs, the REIT portfolios significantly underperform their benchmarks. Overall, our findings show that the market is relatively efficient in the REIT sector, and it is difficult for investors to devise trading strategies that improve the ex-ante predictability of REIT returns based on the standard risk factors.