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Rushing to Overpay: The REIT Premium Revisited

Author

Listed:
  • S. Nuray Akin

    (Department of Economics, University of Miami)

  • Val E. Lambson

    (Department of Economics, Brigham Young University)

  • Grant R. McQueen

    (Marriott School, Brigham Young University)

  • Brennan Platt

    (Department of Economics, Brigham Young University)

  • Barrett A. Slade

    (Marriott School, Brigham Young University)

  • Justin Wood

    (Marriott School, Brigham Young University)

Abstract

We 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.

Suggested Citation

  • S. Nuray Akin & Val E. Lambson & Grant R. McQueen & Brennan Platt & Barrett A. Slade & Justin Wood, 2011. "Rushing to Overpay: The REIT Premium Revisited," Working Papers 2011-1, University of Miami, Department of Economics.
  • Handle: RePEc:mia:wpaper:2011-1
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    File URL: https://herbert.miami.edu/_assets/files/repec/wp-2011-1.pdf
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    References listed on IDEAS

    as
    1. Terrence Clauretie & Paul Thistle, 2007. "The Effect of Time-on-Market and Location on Search Costs and Anchoring: The Case of Single-Family Properties," The Journal of Real Estate Finance and Economics, Springer, vol. 35(2), pages 181-196, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Real Estate Investment Trusts (REITs); commercial properties; hedonic price analysis; repeat transactions; market efficiency; law of one price; price premium;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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

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