DEMYSTIFYING THE MANAGEMENT STRUCTURE PUZZLE: AN EMPIRICAL INVESTIGATION INTO THE DRIVERS OF REIT INTERNALISATION

Abstract

Existing literature has shown that externally-managed Real Estate Investment Trusts (REITs) have underperformed their internally-managed counterparts. Despite this, numerous REITs continue to adopt an external management structure. This paper investigates the factors that drive (deter) REITs to internalise (from internalising) their manager by studying the characteristics of 26 internalisation subjects in Australia at their point of internalisation. We compare their financial, corporate governance and portfolio characteristics to a control group, and find that market to book ratio, the parent of the REIT manager, asset size and geographic diversity of assets to be significant drivers (deterrents) of internalisation. The low growth prospect faced by large Australian REITs that had a domestic investment focus motivates them to internalise their manager. In the second part of this study, we investigate shareholder wealth effects following internalisation, and document how these vary with the characteristics of the REIT. We find that internalisation leads to negative wealth effects, and that the magnitude is larger for smaller REITs with a high market to book ratio.