THE IMPACT OF HIGH DEVELOPMENT INVOLVEMENT ON THE PERFORMANCE OF U.S. REIT SECTOR

Abstract

There seemed to be a shift in trend whereby REITs are engaging in property development in addition to managing investment portfolio in their business structure. REIT started off as a special purpose vehicle which solely manages property in portfolio in return for rental income which is passed through to investors as dividends. However, with greater desire to enhance return, REITs are seeking for alternative Real Estate related business to generate higher earnings. One way is to seek property development projects, a common strategy which Real Estate Companies adopt to achieve higher yield in a shorter amount of time. However, does high development involvement truly lead to higher return? In addition, given that property development projects are higher in risks, does high development involvement REITs gain from getting excess return at the end of the day after taking into consideration the risk-return trade off? This paper seeks to examine the effects of high development involvement REITs return performance in the market, relative to other REITs that adopt a typical business structure with little or zero development involvement. Based on the sampled U.S. Equity REITs, the results showed that there was a weak negative relationship between development involvement and return performance of REITs. However, the results were shown to be statistically insignificant for several years, indicating that there is no strong relationship. In fact, the return performance was attributed from the changing market conditions, the negative relationship was postulated to be susceptible to market shocks, as higher risk returns tend to be more volatile.