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Public vs. Private Market Arbitrage – Can Growth REITs Benefit from their High Valuation?

Author

Listed:
  • David H. Downs
  • Steffen Sebastian
  • René-Ojas Woltering

Abstract

This paper examines the impact of the ratio of price-to-fundamental value on the stock market performance of real estate securities following seasoned equity offerings and senior debt issuances. Using a global sample of real estate securities, we distinguish between growth stocks, i.e. those with the highest stock prices relative to the private market value of their properties, and value stocks, which tend to trade at substantial discounts to their net asset value (NAV). Consistent with the notion that newly issued equity is ultimately priced similar to pre-SEO levels, we find that growth stocks perform significantly better than value stocks in the 36 months following the SOE. We also examine the long run performance following senior debt issuances and document a substantial outperformance (underperformance) for growth (value) real estate securities in the 36 months following the offering. Overall, our findings are consistent with the hypothesis that growth REITs can benefit from "public vs. private market arbitrage".

Suggested Citation

  • 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).
    • Handle: RePEc:arz:wpaper:eres2017_329
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    References listed on IDEAS

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    1. 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.
    2. Joseph T.L. Ooi & Seow‐Eng Ong & Poh‐Har Neo, 2011. "The Wealth Effects of Property Acquisitions: Evidence from Japanese and Singaporean REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(3), pages 487-505, September.
    3. Allen, Paul R. & Sirmans, C. F., 1987. "An analysis of gains to acquiring firm's shareholders : The special case of REITs," Journal of Financial Economics, Elsevier, vol. 18(1), pages 175-184, March.
    4. Gary Matthews & Mark Bye & James Howland, 2009. "Operational Improvement: The Key to Value Creation in Private Equity," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(3), pages 21-27, June.
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    JEL classification:

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

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