What Drives Institutions to Invest in REITs
The purpose of this paper is to investigate the macroeconomic and microeconomic factors that drive institutions to invest in real estate investment trusts (REITs). Institutional investors are known for sophisticated investment strategies, monitoring manag
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What Drives Institutions to Invest in REITs
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What Drives Institutions to Invest in REITs
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What Drives Institutions to Invest in REITs
5.1
Introduction
The purpose of this paper is to investigate the macroeconomic and microeconomic factors that drive institutions to invest in real estate investment trusts (REITs). Institutional investors are known for sophisticated investment strategies, monitoring management and identifying investment opportunities. Numerous studies investigate the cross-sectional variation of institutional investment by REIT characteristics to provide a guide on how to tailor an attractive REIT structure. They find firm size among many determinants to be the most prominent driver of institutional REIT investment (Below et al., 2000b; Ciochetti et al., 2002). However, the impact often varies with the time period analyzed (Below et al., 2000b). In particular, the coefficients for financial ratios, such as firm size, market-to-book ratio, return on assets and leverage, are not consistent across time. This suggests that period-specific factors are at work, such as macroeconomic factors or REIT-specific sentiment factors. Institutional investors may also pursue market timing strategies or inflation hedging. This study addresses the likely time dependence of institutional investments in REITs within the context of a panel data set. In particular, we investigate two questions. First, to what extent do changing macroeconomic conditions affect
N. C. Striewe, Corporate Governance of Real Estate Investment Trusts, Essays in Real Estate Research 10, DOI 10.1007/978-3-658-11619-4_5, © Springer Fachmedien Wiesbaden 2016
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institutional investors in their decision to buy or sell REITs? Second, are there particular
REIT
characteristics
that
drive
institutional
investment
and
disinvestment over time? Knowing the preferences of institutional investors is instrumental to successfully operate REITs. REITs could tailor operating and financial characteristics to a particular institutional clientele to raise their market value. A better understanding of how macroeconomic considerations influence institutional investors could give REITs an understanding of when and why institutional capital is supplied or withdrawn. Knowledge of institutional preferences for certain macroeconomic conditions is beneficial for REITs as it aids them in gauging their accessibility to the equity market. It could also assist institutionally owned REITs in their efforts to time the market more effectively to benefit from stock mispricing.44 This study is the first to take macroeconomic factors explicitly into account and to derive causal inferences about the microeconomic determinants of institutional ownership for the REIT market. The identification strategy relies on the firm fixed-effects estimator, which focuses on explaining the within variation of institutional ownership and takes into account any unobserved heterogeneity across firms.45 The estimates are based
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