UK REIT conversion and institutional ownership dynamic
| Published date | 26 August 2020 |
| DOI | https://doi.org/10.1108/JPIF-05-2020-0061 |
| Date | 26 August 2020 |
| Pages | 349-365 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Woei Chyuan Wong |
UK REIT conversion and
institutional ownership dynamic
Woei Chyuan Wong
School of Economics, Finance and Banking, Universiti Utara Malaysia,
Sintok, Malaysia
Abstract
Purpose –The purpose of this paper is to examine the impact of conversion to REIT status by former listed
property companies in the United Kingdom on the level of institutional ownership during the period of
2007–2016.
Design/methodology/approach –This paper uses an event study framework to track the change in
institutional ownership three years before and after a REIT conversion event. This event study approach
circumvents the sample selection bias issue associated with the conversion event wherein the decision to
convert to REIT is likely to be endogenous.
Findings –Panel regression analysis reveals that changing to REIT status led to a 12.8 and 15.2% increase
in institutional ownership and number of institutional investors, respectively. The first order of priority in
institutional investors’investment in REIT shares is their preference for liquidity. Further analysis shows
that institutional investors changed their preferences towards characteristics associated with systematic risk,
firm age and liquidity after the conversion event by becoming less averse to firm-specific risk, placing more
emphasis on firm age and less emphasis on systematic risk and liquidity.
Practical implications –Overall, conversion to REIT status helps increase former property companies’
investor base, which is in line with the regulator’s aim to open up the property market to a wide range of
investors through the introduction of a REIT regime. Findings from this paper also have policy implications for
countries that are considering a REIT regime for their capital market and existing REIT regimes without a
formal conversion mechanism.
Originality/value –This paper offers, for the first time, evidence on 1) how conversion to REITs influences
firms’institutional ownership and 2) the determinants of converted REITs’institutional ownership.
Keywords REIT conversion, UK REITs, Institutional ownership, Number of institutional investors, REIT
regime, REIT status
Paper type Research paper
1. Introduction
An extensive body of research has examined the determinants of institutional ownership.
The central findings from this strand of literature are as follows. First, institutional
ownership of US common stock has increased dramatically over the past 60 years, from 7% in
1950 to 50% in 1999 (Bennett et al., 2003) and to 61% in 2014 (Franks, 2020). Second, certain
firm characteristics proxied for institutional investors’motives for liquidity, prudent
investment and trading strategy are consistently found to be significantly related to the level
of institutional ownership (Del Guercio, 1996;Gompers and Me trick, 2001). Third,
institutional investors’preferences towards these firm characteristics tend to change over
time (Bennett et al., 2003;Devos et al., 2013). Bennett et al. (2003), for instance, document that
institutional investors in the USA have shifted their preferences towards smaller and riskier
securities with the aim of maximizing risk-adjusted performance.
The literature on REIT institutional ownership documents the dramatic increase in
aggregate institutional holdings of US REITs in the 1990s. Institutional ownership increased
UK REIT
conversion and
institutional
ownership
349
The author thank two anonymous referees, Colin Lizieri, Jing Chi and participants at the 2017 AsRES
conference and the 2018 MFA conference for their helpful comments. Financial support from the
Malaysia Ministry of Higher Education through its FRSG research grant (Code S/O: 12909) is gratefully
acknowledged.
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 28 May 2020
Revised 2 August 2020
8 August 2020
Accepted 8 August 2020
Journal of Property Investment &
Finance
Vol. 39 No. 4, 2021
pp. 349-365
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-05-2020-0061
from less than 10% during the pre-1990s period (Wang et al., 1992) to 41.7% in the post-1990s
period (Ling and Ryngaert, 1997). This was due to the change in REIT regulations that
increased the acceptance of REITs among institutional investors in the post-1990s period. In
particular, the relaxation of the look-through ownership requirement that used to constrain
institutional investors’investment in REIT. Specifically, since 1993, institutional investors
are no longer considered as a single stockholder where their ownerships are passed through
to their beneficiaries (Chung et al., 2010). This avoids the breaching of the closely held
ownership rule (“five or fewer”rule) by institutional investors and makes them, collectively,
the main shareholders of REIT shares in the USA [1].
Existing REIT literature on institutional investors focusses primarily on the impact of
institutional ownership on firm performance (Graff and Young, 1997;Downs, 1998;Friday
et al., 1999;Chung et al., 2010) and corporate governance (Feng et al., 2010;Hartzell et al., 2006)
arising from the monitoring roles of institutional investors. Generally, findings from this
strand of literature support the monitoring roles of institutional investors in reducing the
agency problem, thus enhancing the performance and efficiency of REITs. The literature on
the determinants of REIT institutional ownership, on the other hand, is relatively scant.
Focussing on institutional ownership change surrounding the global financial crisis (GFC),
Devos et al. (2013) document that institutional investors place more emphasis on managing
risk during the GFC by reducing their holding of risky REITs while increasing their holding
of larger REITs. An earlier study by Ciocheitti et al. (2002) finds that institutional investors
prefer larger and more liquid REITs. Consistent with their liquidity-constraint hypothesis,
liquidity variables (stock price, trading volume and market price) are found to be positively
related to institutional ownership.
In this paper, I ex amine the impact o f conversion to RE ITs by existing li sted property
companieson the levelof institutionalownership. I dothis by focussingon a sample of UK listed
propertycompanies thatopted to convert to REITswhen the REIT regimewas first introduced
in the United Kingdom on 1 January 2007. This research question is important for institutional
investors, because they are the main investors in the UK stock market, having a 78% equity
holding in UK listed firms at the end of 2014 (Franks, 2020). Research has shown the positive
impact of institutional investors on firm value due to their monitoring roles and th e reputation
effects associated with institutional investment. The monitoringroles of institutionalinvestors
minimize the agency problems and inefficiencies in information dissemination, which, in turn,
increases firms’liquidity and reduces trading costs. The reputation impact is particularly
important for UK REITs that made their debut in the capital market in 2007. The participation of
institutional investors may bolster investors’confidence in the UK REITs and attract the
attention of financial analysts during the early stage of the REIT sector’s inception.
I track the change in institutional ownership for each of the converted REITs, three years
before and after they were converted to REITs. This event study approach allows me to
circumvent sample selection bias issues, because the conversion decision is likely to be
endogenous. Conversion probability sho uld be higher for property companies with
characteristics that are closer to the requirements of REIT regulation. Importantly, this
approach provides me a natural experiment setting to investigate the change in the
preference of institutional investors following the adoption of REIT regulation, which is more
stringent and transparent than listing rules for conventional companies.
This paper is most closely related to that of Brounen et al. (2013), who examine the change
in performance and firm characteristics of firms converted to REITs in France, Germany, the
United Kingdom and the USA [2]. The authors find that firms that converted to REITs
experience a decrease in systematic risk (beta) and leverage, a small increase in stock
turnover levels and an increase in dividend payouts. The authors also find support for their
hypothesis that converted REITs’dividend announcement effects are less informative
following their adoption of REIT standards that strip away managers’discretion in dividend
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