Property development activities: value creation or distraction for REITs?
| DOI | https://doi.org/10.1108/JPIF-10-2021-0079 |
| Published date | 07 January 2022 |
| Date | 07 January 2022 |
| Pages | 311-319 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Woei Chyuan Wong,Joseph T.L. Ooi |
Property development activities:
value creation or distraction
for REITs?
Woei Chyuan Wong
School of Economics, Finance and Banking,
Economic and Financial Policy Institute (ECOFI), Universiti Utara Malaysia,
Sintok, Malaysia, and
Joseph T.L. Ooi
Real Estate Department, National University of Singapore, Singapore, Singapore
Abstract
Purpose –This paper examines the evolution and impact of property development activities on REIT
performance. The paper provides insights on whether REITs should venture into property development in
addition to their core-business of holding income producing properties.
Design/methodology/approach –This paper charts and highlights the evolution of development activities
of US REITs from 1992 to 2020. The Tobin’s Q of property developing REITs and non-property developing
REITs are compared using univariate analysis.
Findings –Development activities of US REITs grew dramatically during the run up to global financial crisis
(GFC) in 2008. The level of development activities has dropped since the GFC and it has not return to its pre-
crisis peak. In comparison, development activities of listed property investment companies and homebuilders
are less volatile over the same period. The data reveals that property developing REITs enjoy significantly
higher Tobin’s Q as compared to their non-developing counterparts.
Practical implications –Our graphical evidence from a market without development restriction suggests
that development restriction in other REIT regimes has it value in limit REITs’excessive risk-taking tendency
during a booming property market. The positive relationship between Tobin’s Q and the existence of property
development activity support the value creation of this business activity to REITs.
Originality/value –This paper raises overbuilding as a potentialcause of the underperformance of the REIT
sector during the GFC.
Keywords Property development, Development restrictions, REITs, Developer, Global financial crisis
Paper type Viewpoint
Can REIT become a full-fledged developer?
The business model of a REIT is to own income producing properties and collect periodic
rental revenue from the portfolio. Unlike property developers, REITs do not actively develop
properties either for investment or for sale to third-party. As a passive investment vehicle, the
primary aim of REITs is to provide high and stable income to its shareholders. Their
exposure to development risks is also limited by REIT regulations. Table 1 tabulates the
restrictions on property development activities across 29 countries/markets [1].
There exists significant variation in term of development restriction among REIT regimes
ranging from no restriction in Australia, France and US to partial restriction in Japan,
Malaysia and Singapore and total prohibition in Bulgaria and Hong Kong. Two reasons are
generally cited for restricting REITs’development activities. First, it prevents REIT from
shifting their risk profile which is predominantly passive and defensive in nature. Second, it
maintains fair competition between non-REIT tax paying property development companies
and tax-exempt property developing REITs (Brounen and Piet, 2004).
While US REITs are allowed to develop their own investment properties, there are two
pieces of regulations that prevent a REIT in the United States from becoming a full-fledged
developer. First, the dealer rule requires REITs to keep properties in their portfolio for no
Property
development
activities of
REITs
311
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 5 October 2021
Revised 17 December 2021
Accepted 17 December 2021
Journal of Property Investment &
Finance
Vol. 40 No. 3, 2022
pp. 311-319
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-10-2021-0079
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