Institutional Investors and Home-Biased REITs

Abstract

Real estate investment trusts (REITs) are frequently considered an investment opportunity for institutional investors due to their above-average returns with respect to other financial instruments. Due to the unique characteristics of the real estate market, geographically specialized (home-biased) REITs can normally benefit from higher-quality information for selecting investment opportunities and from a reduction of the cost of monitoring and servicing asset owners. Home-biased REITs can be particularly appealing for institutional investors because the addition of this type of asset to an already diversified investment portfolio can optimize the risk–return of their investment strategy and mitigate the concentration of real estate investments. This paper considers all the REITs in Standard & Poor’s Global REIT Index and evaluates the percentage of investment released by (domestic and foreign) institutional investors and its change over time. Focusing on REITs’ international real estate exposure, this paper shows that geographical diversification matters for investment decisions made by international investors and the results are robust with respect to the time horizon and the proxy for ownership concentration.

Acknowledgements

The authors are grateful to the two anonymous referees for all the useful suggestions provided for improving the paper. This paper is the result of the authors’ common efforts and continuous exchange of ideas. The introduction and literature review are ascribed to Lucia Gibilaro and the other sections to Gianluca Mattarocci. Dr. Gibilaro moved to University LUMSA while this article was under review.

Notes

1 The REIT’s types considered are healthcare, hospitality, industrial, logistic, office, residential, retail, and other.

2 The REIT’s countries considered are Austria, Belgium, Canada, China, France, Germany Greece, Hungary, Israel, Italy, Japan, Mexico, Malaysia, Netherlands, New Zealand, South Africa, Singapore, Spain, Thailand, Turkey, Taiwan, United Kingdom, and United States.

3 The four portfolios are constructed year by year, considering the percentage institutional ownership (all institutional and only foreigners) and classifying REITs on the basis of their quartile distribution.

4 Summary statistics of all the dependent and independent variables are presented in Table A1 in the appendix.