Institutional involvement and the REIT January effect over time

Abstract

The Revenue Reconciliation Act of 1993, implemented since 1 January 1994, facilitates the increase of institutional investment in the real estate investment trust (REIT) market. Utilizing this particular feature in the market, we examine the time‐series effect of institutional holdings to distinguish the tax‐loss‐selling hypothesis and the window‐dressing hypothesis for REITs. Consistent with the tax‐loss‐selling hypothesis, we have evidence that the January premiums decreased with the level of institutional involvement for REITs. Furthermore the January premiums declined significantly for equity REITs only that attracted more institutional investors than mortgage REITs. On the other hand, the January premiums did not decrease significantly for mortgage REITs. Overall the results suggest that trading strategies to profit the higher January returns may work only when institutional investors exit and leave the market.

Lodging REIT Performance and Comparison With Other Equity REIT Returns

“…(Han & Liang, 1995). Further, construction and real estate development loans declined from 53 % of total assets in 1972 to only 6 % in 1984 (Lee & Lee, 2003).…”

“…As can be seen in In 1989, REIT growth, development and popularity as investment vehicles got an indirect boost when the Resolution Trust Corporation was created to assist the faltering saving and loans banks and other lending institutions. This action resulted in REIT shares being sold by banks that held these shares at a low price which attracted investors into the REIT market (Lee & Lee, (2003), which resulted in the REIT market experiencing a Bull market starting in 1991 (Block & French, 2002).…”

“…In fact, the recovery and reemergence of REITs during the 1980s has be largely attributed to the passage of the Tax Reform Act of 1986 (Han & Liang, 1995;Lee & Lee, 2003) which transformed and enhanced REITs as competitive real estate investment vehicles by removing the advantages previously enjoyed by other tax driven investments (Han & Liang, 1995). This Act has been credited in launching the second REIT "boom" phase as it once again altered the dynamics of real estate investing and signaled the emergence of REITs as bona fide investment vehicles.…”

“…Modern day REITs are a therefore a direct creation of the Internal Revenue Code (Brueggeman & Fisher, 2005) and the United States Congress (Lee & Lee, 2003), and were designed to be pass-through entities that distribute to its shareholders a substantial portion of its earnings in addition to capital gains generated from the sale or disposition of its assets. It is important to note that prior to the passage of Act in 1960, investors could only participate in the real estate market through the purchase of real estate and not from the stock market.…”

Structural Breaks and Cross-Continental Real Estate Securities Diversification: Evidence From Spanning Tests

“…Several studies also find that institutional participation changes REIT return behavior (Crain, Cudd and Brown, 2000;Lee and Lee, 2003;Chan, Leung and Wang, 2005). In addition, Liow and Sim (2006) suggest that returns of U.S. REITs and Asian real estate securities have became more interdependent after the 1997-1998 Asian financial crisis.…”