REIT Factors

Abstract

Employing a transparent, replicable methodology with CRSP-Ziman data from 1987 to 2023, this paper develops and analyzes six REIT return factors: size, value, momentum, quality, low volatility, and reversal. Our REIT-specific factors demonstrate substantially improved explanatory power over general equity asset pricing models, achieving a 33% higher median firm-level R2 and reducing average unexplained alpha by nearly 3% per year. Reversal, momentum, quality, and low volatility factors generate significant risk-adjusted returns in REITs. While the size factor underperforms, the value factor shows a robust premium only after controlling for its negative exposures to REIT momentum, quality, and low volatility. These factors exhibit distinct behaviors across economic regimes and remain robust to transaction costs. Compared to general equity factors, REIT momentum, quality, and reversal yield unique alphas, highlighting real-estate-specific return anomalies. After testing over 15,000 additional predictors, we find that while almost all are subsumed by our six factors, novel signals tied to financial health may provide incremental value. This study advances REIT asset pricing with a comprehensive factor framework and dataset at reitfactors.ai.

Keywords: real estate investment trusts, REITs, REIT factors, factor investing, momentum, value, low volatility, market anomalies

JEL Classification: G12, G23, R33, G11, G14, C58