Can Bank Lines of Credit Protect Reits Against a Credit Crisis?

Real Estate Economics, March 2012

Posted: 19 Apr 2011

See all articles by Joseph T. L. Ooi

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate

Wong Wc

affiliation not provided to SSRN

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2011

Abstract

In a tight credit market, the primary concern of most REITs is the ability to access capital and maintain adequate liquidity. Bank lines of credit or loan commitments, which are legally binding contracts arranged to provide debt at the call of the borrowers under pre-specified terms, have been theorized to provide insurance protection against a credit crisis. This paper examines whether bank lines of credit can indeed provide some insurance for REITs and allow them to access credits during bad times. Covering three credit crunch events, both the origination and utilization patterns of commitment loans by 275 REITs publicly traded between 1992 and 2007 are analyzed. We find that bank lines of credit insulated REITs from credit rationing at both the broad market level as well as at the firm level. However, the insurance value is qualified in the case of smaller and risky firms which may not get to extend their credit limit or draw down on their existing credit lines in a credit crisis.

Keywords: loan commitments, bank lines of credit, credit crunch, REITs

Suggested Citation

Ooi, Joseph T. L. and Wc, Wong and Ong, Seow Eng, Can Bank Lines of Credit Protect Reits Against a Credit Crisis? (April 18, 2011). Real Estate Economics, March 2012, Available at SSRN: https://ssrn.com/abstract=1814196

Joseph T. L. Ooi (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Wong Wc

affiliation not provided to SSRN ( email )

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
01-65-6516-3552 (Phone)
01-65-6774-8684 (Fax)

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