Geographic Diversification in Real Estate Investment Trusts

Real Estate Economics, 2019

39 Pages Posted: 13 Feb 2020

See all articles by Zhilan Feng

Zhilan Feng

Clarkson University

Maneechit Pattanapanchai

New York State Assembly

S. McKay Price

Lehigh University - Perella Department of Finance

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Date Written: November 18, 2019

Abstract

Whether geographic diversification within property portfolios is ideal remains an open question, with most studies finding either a diversification discount or no evidence of benefits. Using a sample of equity real estate investment trusts (REITs) from 2010–2016, we find a nonlinear relation between geographic diversification and firm value. Specifically, geographic diversification is associated with higher REIT values for firms that can be described as being more transparent (i.e., they have high levels of institutional ownership or invest in core property types.) Whereas, geographic concentration is associated with higher REIT values for firms that can be described as being less transparent (i.e., they have low levels of institutional ownership or invest in non-core property types.) Operating efficiency, at both the property- and firm-levels, are the means by which the diversification value is realized. Operations improve as property portfolios become more geographically diversified for more transparent firms. When the improvements are decomposed into revenue generation and expense efficiency portions, we find revenue generation to be the main operational channel through which the benefits are obtained.

Keywords: Geographic Diversification, Real Estate Investment Trusts, REITs, Property Portfolios, Operating Efficiency

JEL Classification: R30, R32, G23, G32, G10

Suggested Citation

Feng, Zhilan and Pattanapanchai, Maneechit and Price, S. McKay and Sirmans, C. F., Geographic Diversification in Real Estate Investment Trusts (November 18, 2019). Real Estate Economics, 2019. Available at SSRN: https://ssrn.com/abstract=3522619

Zhilan Feng

Clarkson University ( email )

United States

Maneechit Pattanapanchai

New York State Assembly ( email )

242 West 27th Street
New York, NY 10001
United States

S. McKay Price (Contact Author)

Lehigh University - Perella Department of Finance ( email )

621 Taylor Street
Bethlehem, PA 18015
United States
610-758-4787 (Phone)

HOME PAGE: http://www.mckayprice.com

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

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