REITs and Liquidity in Real Estate Markets

Abstract

Is setting up a real estate investment trust (REIT) regime a zero-sum game? Using a unique set of institutional real estate investment data from 146 countries (including 59 countries with a REIT regime) for 2001 to 2014, we find significant increases in investments in local real estate markets of 25.3% in terms of transaction value and 18.0% in terms of transaction volume after countries set up a REIT regime. The increases are more than enough to offset the reductions in foreign real estate investments of 11.2% and 7.4% in transaction value and volume, respectively. Our evidence suggests that the declines in foreign investments are motivated by foreign investors seeking liquidity by switching their real estate investments to REITs. The liquidity benefit associated with a REIT regime is also supported by evidence of reduced stock market volatility and higher comovements of local stock returns with global REIT returns. The findings help allay apprehensions among policymakers that a REIT regime may reduce investments in local real estate markets.

Keywords: Liquidity, Transparency, Efficiency, REIT Regime, Cross-border Real Estate Investments, Foreign Investors

JEL Classification: G15, G29, R3