VALUE CREATION AND REITS : IS BIGGER BETTER?

Abstract

This paper examines the relationship between size and value creation of REITs. The proxy used for size is market capitalization and Economic Value Added (EVA) for value creation. The EVA for 89 REITs across 5 countries is computed and a panel regression is used to find out the relationship between their market capitalization and EVA. Overall, the results suggest that most REITs fail to generate periodic income to cover their cost of capital. Hence REITs appear to be destroying rather than creating shareholder value. The results also show that the Economic Value Added for REITs is positively affected by the increase in size or market capitalization. By taking the square of market capitalization, it suggests that there may be an optimal size for REITs and that diminishing marginal returns will set in after some point when REITs get too large.