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the historical performance of REITs

the historical performance of REITs - THE JOURNAL OF REAL...

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Introduction REITs are important investment vehicles in direct real estate ownership and lending. Because such a high level of both resources and knowledge is required, very few investors are able to participate directly in the ownership or financing of commercial real estate properties. Investment in real estate through REIT ownership, however, does not require the large and long-term financial commitment typical of other real estate investment alternatives. The ownership of most REITs can also be easily transferred with very low transaction costs, since shares of most REIT stocks are publicly traded. Therefore, REITs provide a mechanism to pool resources that enables investors, especially small investors, to gain the economic and other benefits of commercial real estate investments. In today’s illiquid real estate market, REITs have attracted more and more attention as liquid real estate investment vehicles, even from institutional investors such as pension funds. Since the late 1970s, many researchers have studied REIT performance and have contributed a great deal to our understanding of this important real estate investment vehicle. Unlike the consistent findings on the apparently superior performance of un- securitized real estate (Wendt and Wong, 1965; Friedman, 1970; Miles and McCue, 1984; Brueggeman, Chen and Thibodeau, 1984; Lusht, 1988), research findings on REIT per- formance, especially equity REIT performance, have been mixed, relative to the stock market portfolio. For instance, while some researchers such as Smith and Shulman (1976), Titman and Warga (1986), and Goebel and Kim (1989) suggested that the performance of REIT stocks was worse than, or comparable to, the market portfolio, THE JOURNAL OF REAL ESTATE RESEARCH 235 235 Jun Han* Youguo Liang** The Historical Performance of Real Estate Investment Trusts *CIGNA Investment Management, 900 Cottage Grove Road, S314, Hartford, Connecticut 06152-2314. **Department of Finance, College of Business Administration, Cleveland State University, Cleveland, Ohio 44115. Date Revised—March 1995; Accepted—March 1995. Abstract. This empirical study investigates the performance of Real Estate Investment Trusts (REITs). Although many people have studied REIT performance, their findings on the long-term performance of REITs are generally inconclusive. The objectives of this study are: (1) to evaluate the long-term (1970–1993) performance of REITs; (2) to examine the stability of REIT performance over time; and (3) to investigate the sensitivity of a specific performance measure, the Jensen index, to two general performance benchmarks and two REIT samples. The results indicate that the performance of the REIT portfolios was consistent with the security market line for the 1970–1993 period. However, REIT perform- ance varied over the period. This study also found that the use of the unrepresentative S&P 500 index as a performance benchmark tends to overstate REIT performance. Finally, survivor REITs in general performed better than the overall REIT population.
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others such as Burns and Epley (1982), Kuhle (1987), and Sagalyn (1990) found that REITs, especially equity REITs, outperformed the stock market portfolio. The debate
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