The Equity Risk Premium for Securitized Real Estate: The Case for U.S. Real Estate Investment Trusts

Robert Edelstein and Konstantin Magin

Journal of Real Estate Research, 2013, vol. 35, issue 4, 393-406

Abstract: This paper examines an important topic about the performance of securitized real estate by estimating the expected equity risk premium for U.S. real estate investment trusts (REITs). By employing a novel methodology, explicitly incorporating REIT shareholders taxation for capital gains and ordinary income, the analysis demonstrates that the expected after-tax risk premiums for REITs generate and are consistent with a reasonable coefficient of relative risk aversion. This finding is contrary to much of the literature about the risk premium. We demonstrate that for a range of plausible stochastic tax burdens, the coefficient of relative risk aversion for REIT shareholders is likely to fall within the interval of 4.3–6.3, values significantly lower than those previously reported for real estate and other asset markets.

Date: 2013
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DOI: 10.1080/10835547.2013.12091375

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