Real estate sentiment as information for REIT bond pricing

Abstract

For corporate bond investors, credit ratings have been found to be informationally insufficient due to their limited timeliness and accuracy. This paper investigates the information content of forward-looking commercial real estate investor sentiment for pricing decisions of US REIT bond investors. Using an unbalanced panel data-set for the post-crisis period (2010–2013) and Prais–Winsten regression correcting for contemporaneous and serial correlation, sentiment is found to have a negative effect on REIT bond yields irrespective of S&P index inclusion or credit rating. The effect of sentiment, however, is larger for REITs that are not included in S&P indices than for S&P REITs. Explanations for this finding include institutional investor and REIT characteristics.

Keywords:

• Real estate investment trusts (REITs)
• corporate bond yields
• commercial real estate market
• investor sentiment

Acknowledgements

The author would like to thank the Real Estate Research Corporation (RERC) for providing the sentiment data and a number of anonymous referees for their valuable comments.