اثر تغییرات ساختاری بر ویژگی های ریسک بازده REIT

This investigation provides evidence and identifies two important structural changes in the risk characteristics of real estate investment trusts (REITs), namely, the 1993 tax reform and the inclusion of REITs in the mainstream S&P indices in 2001. Using daily data from 1989 to 2008, this study finds that institutional investors tended to increase their investment in REITs following the 1993 tax reforms, and these increases in institutional investment are significantly reducing exposure to interest rate risk, which may result from the benefits of external monitoring. Additionally, the inclusion of REITs in the Standard and Poor's mainstream indices since 2001 has increased the market risk of REITs, led to associated returns behaving more like those of stocks, and improved the market efficiency in processing new information. These observation results demonstrate these two structural changes in the risk characteristics of REIT returns. Finally, the study results confirm that the shape of the distribution of REIT returns varies among sub-samples, indicating that risk management is increasingly important.

Real estate investment trusts (REITs) have been important in real estate investment since Congress created them in 1960. REITs not only provide alternative investment opportunities and tools that individual investors can use in the real estate market, but also enable individual investors to invest in commercial properties that would otherwise be too large for them. Additionally, because REITs are treated differently for tax purposes than general corporations investing in real estate, the importance of securitized real estate as an asset class has grown considerably. Historical statistics indicate that the market capitalization of the REITs industry amounted to NT$ 312,009 million at the end of 2007, representing an increase of 209 times since 1972. In fact, REITs have displayed astonishing growth considerably in terms of market capitalization, which can be attributed to the increasing number of REITs listed between 1990 and 1999 and the strong share price performance from 2000 to 2006.1 Particularly, these changes also imply some key information. For instance, two break points may exist in the REITs market, which are the Omnibus Reconciliation Act (OBRA) of 1993 and the inclusion of REITs in the S&P 500 index in 2001. Before 1993, to avoid excessive centralization of REIT shares, pension plans were limited in terms of the amount they could invest in REITs based on the five-or-fewer rule, which prohibited excessively concentrated ownership of REITs by specifying that five or fewer shareholders could collectively own no more than 50 percent of the shares of REITs. The 5/50 restriction regarding REIT holdings was modified following the implementation of the 1993 Tax Act. The reform permitted institutions to count each of their own investors in REITs and thus increased more institutional investment in these vehicles. Additionally, the inclusion of REITs in the mainstream benchmark indices of S&P has increased the influence of sentiment in the REITs market since 2001, and has also increased investor awareness of REITs, making them particularly attractive to fund managers. Consequently, it is important that investors be well-informed of the variations in REITs performance and associated risks. In contrast to the existing literature, this study uses high frequency data to examine whether the risk characteristics of REITs have significantly changed in the two break points. The analytical results presented in this study can help investors improve their understanding when making investment decisions and engaging in hedging activities. In the existing literature, several authors have examined the influence of tax reforms on real estate values or REIT returns. However, these studies have generally focused on the effects of the amendments to the 1976 or 1986 Tax Reform Acts (TRAs), which eliminated many investment incentives related to REITs that had been part of earlier tax reforms. For example, Follain, Hendershott, and Ling (1987) used simulation modeling to analyze the effects of tax reform on real estate demand, and argued that the 1986 Tax Reform Act was unlikely to discourage real estate activity at the aggregate level. Depreciable real estate was slightly disfavored due to the increase in the equilibrium level of rents. In contrast, owner-occupied housing was favored, both directly by reduced interest rates and indirectly by increased rents. Nourse (1987) estimated the influence of the tax acts on capitalization rates for real estate using appraisal data. His study demonstrated that the 1976 TRA did not significantly change the capitalization rate, but the rate was still significantly reduced in 1981. Similarly, Sanger, Sirmans, and Turnbull (1990) used market data, involving samples of REITs and non-REIT real estate firms, to evaluate the empirical effects of the 1976 and 1986 TRAs. They argued that the systemic risk of REITs decreased significantly during the period surrounding the passage of each act. Specifically, the discovery is relevant to this investigation because the conclusion clearly identifies the above structural changes as affecting the risk characteristics of the REITs industry. On the other hand, it is important to consider what has affected the development of the REITs market apart from the influences of the tax reforms. Most previous investigations the characteristics of returns series have focused on the relationship between REITs and other markets. Peterson and Hsieh, 1997, Glascock et al., 2000 and Stevenson, 2002 demonstrated that stock market returns significantly influence REIT returns. Particularly, the inclusion of REITs in the S&P mainstream benchmark indices since 2001 has increased the influence of general market sentiment in determining REIT returns. Cotter and Stevenson (2006) noted that the potential for environmental change had implications for issues such as risk measurement and management. If a structural break occurs in the risk characteristics of REIT prices, investors will regard their risk control activities and their hedging portfolios as more important and complex. Therefore, the conclusions regarding the high growth of REITs market capitalization are relevant. High trading of the S&P mainstream indices may drive the changes in REIT risk characteristics. However, no such evidence exists in relation to the variation in the risk characteristics of REIT returns. Consequently, this investigation builds on the current literature by examining some of the key transitions in relation to the risk factors affecting REIT returns. Regarding the REIT risk premia, interest rates are a significant future macroeconomic leading indicator. Particularly, the interest rate on ten-year government bonds has attracted increased market attention. A large number of studies, such as Chen and Tzang, 1988, Liang and Webb, 1995 and He et al., 2003, have identified the interest rate sensitivities of REIT returns. These studies consistently showed that increasing interest rates influence real estate returns via financing costs, real estate demand and higher required rates of return. With a view to concentrating on interest rate dynamics in the past two decades, the interest rate on ten-year government bonds displays great fluctuations. These influences increase the difficulty of hedging and decrease the effectiveness of investment portfolio allocation. In recent decades, Devaney (2001) was the first to examine the effects of interest rate volatility. Devaney argued that increased interest rate volatility leads to expectations changing more frequently, increasing transaction costs and uncertainty regarding the stance of the monetary authorities. Therefore, REIT returns are inversely related to changes in interest rate volatility. However, Liang and Huang (2006) identified ambiguous and time-varying effects from a study of structural changes in Asian property markets. Thus the magnitude and the direction of the interest rate volatility for the REIT returns must be determined empirically. This investigation empirically addresses the following questions. First, what are the effects of the 1993 TRA on the risk characteristics of REIT returns. Second, what are the major risk factors associated with REIT returns after the inclusion of REITs in the mainstream benchmark index? It is important to be able to access and know the risk components of REIT returns. To do this, data on daily REIT returns are gathered from 1989 to 2008. Our sample considers two key characteristics of this study, namely, the 1993 TRA and the inclusion of REITs in the S&P 500 index. We examine the effects both before and after these two events based on the relationships between interest rate volatility and REIT returns, respectively. The analysis also clearly represents the risk properties of REIT returns and clarifies whether the two structural points give rise to changes in the risk factors of REIT returns. The empirical results demonstrate that the return-generating processes of REITs exhibit skewness and heavy tail properties, and that these properties are time variant. Additionally, the impact of interest rate volatility on REIT returns leads to different changes due to increases in both market participants and trading. The remainder of this paper is organized as follows. Section 2 reviews the related literature and discusses the structural changes occurring in the REITs market. Section 3 then describes the empirical method, introduces the distribution type of traditional returns and develops a more suitable model than the traditional model for accurately capturing the pattern of REIT returns. Section 4 describes the data sources and presents summarized statistics. Section 5 presents the empirical results and compares the results for the different sub-samples. Finally, the conclusion summarizes the findings and analysis.

This study examined the risk characteristics of REIT returns and investigated whether the risk factors exhibited significant changes after considering significant structural changes. The primary aim was to clarify the following: what are influences of the 1993 TRA on the risk characteristics of REIT returns? What are the major risk factors associated with REIT returns after their inclusion in the mainstream benchmark index, and what is the property non-normal distributions of the error terms? The empirical results reveal important structural changes in the risk characteristics of REIT returns. The evidence suggests that the 1993 TAR has caused institutional investors to invest more in the REITs market, thus increasing the monitoring of REIT value, decreasing risk exposure in the bond and stock markets, and slowing the response of REIT returns to new market information. One possible explanation for the phenomenon is the largest factor in encouraging the growth of the sector and the large number of IPOs following 1993. The loose policy surrounding the 5/50 rule also implies that market makers may strongly influence prices and also accelerate the development of the REITs industry. Therefore, these factors may reduce market efficiency, thus negatively impacting relationships between the REITs market and other asset classes. However, because REITs have been included in the mainstream S&P indices since 2001, the relationships between REITs and other capital markets have given rise to significant changes. This observation has some important implications. One implication is that the role of the equity market is extremely important. Owing to increasingly diverse investors and increased trading, the REITs sector became more efficient in terms of new information processing and thus came to increasingly resemble the stock market. That is, REITs behaved increasingly like common stocks. Another intention is that market sentiment is becoming more and more volatile, indicating that increases in daily trading have changed the daily volatility patterns of REIT returns. Assuming rational investors and an efficient market, REIT prices will effectively reflect the uncertain risk associated with increased interest rate volatility. Finally, the study results also confirm the importance of environmental change. From the estimations of the returns distributions, distribution types vary owing to significant kurtosis and the presence of fat tails in the two sub-samples. The assumption of normality thus is problematic in analyzing financial data. The result also suggests that investors should adopt more complex hedging strategies, and that risk management is crucial for reducing equity market risk. Consequently, the modeling of a non-normal distribution may help investors solve the potential problems associated with measuring error arising from market risk.