TAILIEUCHUNG - Income vs. Appreciation: The Investment Value of Real Estate Investment Trusts

Social sustainability tends to be viewed as the ‘softer – politically correct’ component of sustainable development. This is a poor, yet widely-held misreading of the very tangible benefits social sustainability can bring to a real estate, or as is the focus here, investment in real estate. Much greater clarity of the influence of social sustainability in what is all too often a short-term focus on quick returns on is urgently required. More precise measurement and reporting of social sustainability will greatly advance this understanding of its importance and will help to progress the arguably marginalised second component of. | Income vs. Appreciation The Investment Value of Real Estate Investment Trusts Tobias Miihlhofer London School of Economics and Political Science f December 16 2004 Abstract In this paper we address the dichotomy in short-term performance between REITs and direct property by arguing that REITs are primarily income vehicles and that an end investor in a REIT does not have access to short-term appreciation opportunities contained in direct property prices. In order to do this we compare the useful incremental information content contained in property-level income to that contained in propertylevel appreciation. We find that over our entire 1978-2003 sample both income and appreciation provide useful information content in explaining REIT returns but over any subsample periods that we analyze only income provides useful information and appreciation does not. These findings support our hypothesis and provide a possible explanation for the short-term pricing dichotomy. 1 Research Papers in Spatial Environmental Analysis No. 97. Dec 2004 ISBN 0 7530 1825 X I e-mail 1 This paper is available for download under http 1 1 Introduction Equity Real Estate Investment Trusts are widely considered by analysts and institutional investors as additions to a diversified multi-asset portfolio as a more liquid and more easily accessible alternative to holdings of direct real estate. However as is widely documented equity REIT returns do not strictly follow the movements and returns of the underlying direct property market while in the long run a fundamental relationship between securitized and unsecuritized real estate seems to exist in the short run REIT returns do not follow those of the underlying property market. This paper attempts to further explore the relationship or apparent lack thereof between the two markets. We do this by examining the relationship of equity REIT returns with property-level income

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