Long-Run Renewal of REIT Property Portfolio Through Strategic Divestment

Masatomo Suzuki (), Seow Eng Ong (), Yasushi Asami and Chihiro Shimizu ()
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Masatomo Suzuki: The University of Tokyo
Seow Eng Ong: National University of Singapore
Chihiro Shimizu: The University of Tokyo

The Journal of Real Estate Finance and Economics, 2023, vol. 66, issue 1, No 1, 40 pages

Abstract: Abstract Real Estate Investment Trusts (REITs) renew and recycle their property portfolios through divestment of inefficient assets and new acquisitions. Most previous literature focuses on the wealth effect of acquisition on REIT-level performance, while the property-level renewal process of REIT portfolios (especially divestments) remains unclear. Using a unique property-level dataset of Japanese REITs, we fill this gap by investigating the determinants of property divestment and the management strategy leading up to the divestments. We find that REITs strategically choose properties designated for divestment. The criteria include: (i) economic obsolescence that is captured through relatively large operating expense and/or a high rental yield within the REIT portfolio, (ii) mismatch in the geographical focus of the REIT, and (iii) a significant change in the capital value since acquisition. Especially during the periods of REIT growth, most of the above criteria apply, suggesting that the long-run renewal of a portfolio leads to its efficient asset allocation. We also provide evidence of property-level earnings management by REITs: the size of the capital expenditure is reduced just before the divestment to increase the net cash flows to appeal to potential buyers.

Keywords: Real Estate Investment Trusts (REITs); Property portfolio renewal; Divestment; Asset allocation efficiency; Capital gain/loss; Earnings management (search for similar items in EconPapers)
JEL-codes: M41 R32 R33 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Long-run renewal of REIT property portfolio through strategic divestment (2018)
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DOI: 10.1007/s11146-022-09895-z

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