REITs Return Behavior and Legal Infrastructure: The 1993 Revenue Reconciliation Act & Inspirations for China's Emerging REITS Market

Minye Zhang and Yongheng Deng

No 8532, Working Paper from USC Lusk Center for Real Estate

Abstract: REIT is an important but complex financial innovation. The next decade is likely to see the emergence and fast development of REITs market in China. The development of a sound legal and regulatory infrastructure is a critical first step. Obviously, the lessons in the 48 years development of the U.S. REITs market provide a great reference for the latecomers. In particular, the 1993 Revenue Reconciliation Act is the most important milestone for REITs history. The study uses a multi-factor risk-based model to evaluate the evolvement of REITs returns behavior before and after the 1993 Act. This model decomposes REITs excess returns into risk premiums of three stock market factors, two bond market factors and one real estate market factor. The results show that this framework is more appropriate in explaining the expected excess return of REITs. This study reveals that the REITs are less stocklike and bondlike, but maybe more real-estate-like after 1993, which is in contrast to the findings of most existing studies. This result indicates that the REITs could provide efficient risk diversification for the stock market and bond market after 1993. This study also documents that the performance of excess REITs returns in post-1993 period outpace that in pre-1993 period in general due to the increase of institutional ownership. In the last part, this paper attempts to provide some legal implications for the development of China’s emerging REITs market.

Keywords: REIT; Risk Analysis; Markets; Legal Infrastructure (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:luk:wpaper:8532

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