The Role of the Underlying Real Asset Market in REIT Ipos

Abstract

One of the leading explanations for cycles in initial public offerings (IPOs) is time-varying supply and demand for the underlying assets of the firms that are considering going public. We test this explanation by examining REIT IPOs over the 1980 to 1998 period. REITs provide a powerful test of this hypothesis due to their homogeneity, transparency, and the relative ease with which investors can observe the state of the underlying real asset markets. Using both supply- and demand-based definitions of hot and cold IPO markets, we show evidence of the link between IPO activity and: (i) the supply and demand for real estate, (ii) the price of REITs relative to their dividends, and (iii) the price of REITs relative to their underlying net asset values. Further, we find no significant difference in post-IPO operating performance for REITs that go public in hot versus cold markets, implying homogeneous firm quality across IPO cycles. Taken together, these tests provide evidence that the supply and demand for real estate capital and the relative price of REITs drive cycles in REIT IPOs.

Keywords: IPOs, REITs

JEL Classification: G32