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Extrapolation Theory and the Pricing of REIT Stocks

Author

Listed:
  • Joseph T.L. Ooi

    (Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore 117 566)

  • James R. Webb

    (Department of Finance, College of Business, Cleveland State University, Cleveland, Ohio 44115)

  • Dingding Zhou

    (Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore 117 566)

Abstract

This paper is the winner of the best paper on Real Estate Investment Trusts award (sponsored by the National Association of Real Estate Investment Trusts (NAREIT)] presented at the 2005 American Real Estate Society Annual Meeting. This study evaluates the investment prospects of value stocks in the real estate investment trust (REIT) market. Value stocks are defined as those that carry low prices relative to their earnings, dividends, book assets, or other measures of fundamental value. The empirical results show that from 1990 onwards, value REITs provide superior returns without exposing investors to higher risks. The evidence is consistent with the extrapolation theory, which attributes the mispricing to investors over extrapolating past corporate results into the future. Interestingly, the findings reveal that such extrapolation is asymmetric in the REIT market. While value REITs are underpriced in accordance with the extrapolation theory, no evidence is found that growth REITs are overpriced. The value anomaly also exhibited several temporal traits. Firstly, the value premium varies over time. Secondly, the magnitude of the premium is inversely associated with the market performance. Finally, the value anomaly is not evident in the pricing of REITs in the 1980s.

Suggested Citation

  • Joseph T.L. Ooi & James R. Webb & Dingding Zhou, 2007. "Extrapolation Theory and the Pricing of REIT Stocks," Journal of Real Estate Research, American Real Estate Society, vol. 29(1), pages 27-56.
    • Handle: RePEc:jre:issued:v:29:n:1:2007:p:27-56
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    References listed on IDEAS

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    Cited by:

    1. Jonathan Wiley, 2014. "Illiquidity Risk in Non-Listed Funds: Evidence from REIT Fund Exits and Redemption Suspensions," The Journal of Real Estate Finance and Economics, Springer, vol. 49(2), pages 205-236, August.
    2. Woltering, René-Ojas & Weis, Christian & Schindler, Felix & Sebastian, Steffen, 2018. "Capturing the value premium – global evidence from a fair value-based investment strategy," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 53-69.
    3. Mamoru Nagano, 2016. "Financing Patterns and Property Acquisitions of Sponsor-backed REITs: Evidence from J-REIT Markets," International Real Estate Review, Global Social Science Institute, vol. 19(2), pages 223-248.
    4. Massimo Guidolin & Manuela Pedio, 2019. "How Smart is the Real Estate Smart Beta? Evidence from Optimal Style Factor Strategies for REITs," BAFFI CAREFIN Working Papers 19117, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Joseph Ooi & Jingliang Wang & James Webb, 2009. "Idiosyncratic Risk and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 420-442, May.
    6. Mohammad Sharik Essa & Evangelos Giouvris, 2023. "Fama–French–Carhart Factor-Based Premiums in the US REIT Market: A Risk Based Explanation, and the Impact of Financial Distress and Liquidity Crisis from 2001 to 2020," IJFS, MDPI, vol. 11(1), pages 1-39, January.
    7. David H. Downs & Steffen Sebastian & René-Ojas Woltering, 2017. "Public vs. Private Market Arbitrage – Can Growth REITs Benefit from their High Valuation?," ERES eres2017_329, European Real Estate Society (ERES).

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    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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