Rushing to Overpay: The REIT Premium Revisited
AbstractWe explore the questions of whether and why Real Estate Investment Trusts (REITs) pay more for real estate than non-REIT buyers, consequently breaking the law of one price. We develop a model where REITs optimally pay more for property because (1) they are able, due to capital access advantages and, (2) are occasionally compelled, due to regulatory time constraints on the deployment of capital. We show that the typically large (20 to 60 percent) and statistically significant (p-values less than 0.01) REIT-buyer premiums found in standard empirical hedonic pricing models are biased due to unobserved explanatory variables. Using a repeat-transaction methodology that controls for unobserved independent variables, we find the REIT-buyer premium to be about 5 percent. Furthermore, we show that REITs¿ ability (as measured by access to capital markets) and regulator compulsion (as measured by capital deployment deadlines) are related to the price premium.
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Bibliographic InfoPaper provided by University of Miami, Department of Economics in its series Working Papers with number 2011-1.
Length: 48 pages
Date of creation: 2011
Date of revision:
Publication status: Forthcoming: working
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Web page: http://www.bus.miami.edu/faculty-and-research/academic-departments/economics/index.html
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Real Estate Investment Trusts (REITs); commercial properties; hedonic price analysis; repeat transactions; market efficiency; law of one price; price premium;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
- R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-30 (All new papers)
- NEP-REG-2011-04-30 (Regulation)
- NEP-URE-2011-04-30 (Urban & Real Estate Economics)
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