Further evidence on the determinants of REITs performance

Abstract

Real estate investment trusts (REITs) are widely used as a part of investment diversification opportunities of physical assets among investors. A number of studies on macroeconomic determinants suggest certain commonalities in commercial property market returns, which are driven by macroeconomic factors. This paper extends the range of common macroeconomic factors of REITs introduced by the existing literature. This paper outspreads the perspective of REITs analysis by employing up to 17 indicators in total that include not only usually used variables (GDP growth, CPI, equity markets indicators) but also new ones (among them with more significant relationships: business cycle, bond yields, PPI, industry production, credit for the private sector, hourly earnings for manufacturing, construction volumes, and building permits). We combine OLS regression (including time lags) with Granger causality and ARDL analysis to obtain more robust results. In the latter case, we identify the short and long-run relationship between EPRA and extended macro drivers. Our results confirm well-established relationships between EPRA, equity price growth, CPI, bond yields, and GDP. They also suggest the countercyclical behavior of EPRA, its negative relationship with PPI, industry variables, credit for the private sector and hourly earnings for manufacturing. However, it demonstrates a positive correlation between construction and residential building permits. The same results are obtained for short-and long-term perspectives. Furthermore, we demonstrate that including these new variables in the model increases its forecasting accuracy. Overall, our research contributes to an existing methodology of forecasting REITs' performance broadening the list of important macroeconomic variables that should be included in estimation of REIT's performance.