Rushing to Overpay: Modeling and Measuring the REIT Premium

We explore the questions of why Real Estate Investment Trusts (REITs) pay more for real estate than non-REIT buyers and by how much. First, we develop a search model where REITs optimally pay more for property because (1) they are willing, due to cost of capital advantages and, (2) they are occasion...

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Bibliographic Details
Published in:The journal of real estate finance and economics 2013-10, Vol.47 (3), p.506-537
Main Authors: Akin, S. Nuray, Lambson, Val E., McQueen, Grant R., Platt, Brennan C., Slade, Barrett A., Wood, Justin P.
Format: Article
Language:English
Subjects:
Commercial real estate
Deadlines
Economic equilibrium
Economics
Economics and Finance
Endowment
Equilibrium
Equity funds
Financial Services
Inflation
Investments
Labor market
Market efficiency
Methodology
Museums
Purchasing
Real estate
Regional/Spatial Science
REITs
Tax exempt organizations
Transactional analysis
Trusts
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Summary:We explore the questions of why Real Estate Investment Trusts (REITs) pay more for real estate than non-REIT buyers and by how much. First, we develop a search model where REITs optimally pay more for property because (1) they are willing, due to cost of capital advantages and, (2) they are occasionally rushed, due to external regulatory time constraints and internal incentives to deploy capital quickly. Second, using commercial real estate transactions, we find that the extant hedonic pricing models contain an unobserved explanatory variables bias leading to inflated estimates of the REIT premium. Third, using a repeat-sales methodology that controls for unobserved property characteristics, we derive more plausible estimates of the REIT premium. Consistent with our model, we also find the REIT-buyer premium depends on the size of the REIT advantage, the rush to deploy, and the relative presence of REITs in the market.
ISSN:0895-5638
1573-045X
DOI:10.1007/s11146-012-9372-1