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REITs: Liquidity and Real Estate Risk

Abstract : This paper investigates the relationship between expected REIT returns and illiquidity risk when real estate risk is taken into account. I empirically show that the absolute level of illiquidity, several dimensions of systematic illiquidity risk, real estate risk and several dimensions of real estate illiquidity risk are priced in the cross-section of REIT returns. I find that two types of systematic illiquidity risk are priced in REIT expected returns: the first group of risks comes from the covariance of REIT returns and illiquidity with equity market returns and illiquidity. The second group of risks arises from covariance of REIT returns and illiquidity with underlying real estate total return and illiquidity, as measured by the benchmark real estate market index. I find that the latter group - illiquidity risk inherent in the real estate market seems to be predominant risk factor in pricing of REIT securities. The later effect has not yet been studied in the literature, and to the best of my knowledge this is the first attempt at examining the role of performance of underlying real estate holdings in asset pricing. Finally, I analyse the relationship between these risks and capital structure, and find that the value of firm's leverage and market value of its free float are positively related to REIT liquidity.
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https://hal-hec.archives-ouvertes.fr/hal-00686123
Contributor : Antoine Haldemann <>
Submitted on : Saturday, April 7, 2012 - 3:30:33 PM
Last modification on : Thursday, January 11, 2018 - 6:19:32 AM

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  • HAL Id : hal-00686123, version 1

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Dragana Cvijanovic. REITs: Liquidity and Real Estate Risk. 2012. ⟨hal-00686123⟩

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