Rushing to Overpay: Modeling and Measuring the REIT Premium
Posted: 17 Sep 2013
Date Written: September 17, 2013
We explore the questions of why Real Estate Investment Trusts (REITS) pay more for real estate than non-REIT buyers and by how much. First, we develop a search model where REITs optimally pay more for property because (1) they are willing, due to cost of capital advantages and, (2) they are occasionally rushed, due to external regulatory time constraints and internal incentives to deploy capital quickly. Second, using commercial real estate transactions, we find that the extant hedonic pricing models contain an unobserved explanatory variables bias leading to inflated estimates of the REIT premium. Third, using a repeat-sales methodology that controls for unobserved property characteristics, we derive more plausible estimates of the REIT premium. Consistent with our model, we also find the REIT-buyer premium depends on the size of the REIT advantage, the rush to deploy, and the relative presence of REITs in the market.
Keywords: Real Estate Investment Trusts (REITs), equilibrium search, hedonic price analysis, repeat-sales analysis, market efficiency, deadlines
JEL Classification: R33, R32, D83
Suggested Citation: Suggested Citation