An Investigation into Sentiment-Induced Institutional
Trading Behavior and Asset Pricing in the REIT Market
Prashant K. Das & Julia Freybote & Gianluca Marcato
Published online: 3 October 2014

Abstract

Institutional investors such as pension funds or insurance companies commonly
invest in the unsecuritized and securitized real estate market.We investigate how
institutional investor sentiment in the commercial real estate market affects institutional
trading behavior in the REIT market and subsequently asset pricing. In particular, we
test two alternative theories – flight to liquidity and style investing theory – to explain
the sentiment-induced trading behavior of institutional investors in the REIT market for
the pre-crisis (2002–2006), crisis (2007–2009) and post-crisis (2010–2012) period. We
find that the applicability of either theory depends on economic conditions. In the precrisis
period institutional investors switched capital in and out of REITs based on their
sentiment in the private market (style investing). However, in the crisis period institutional
investors switched capital from the illiquid private market to the more liquid
REIT market (flight to liquidity). The flight to more liquid REITs continued into the
post-crisis to a lesser extent and suggests that the financial crisis has changed institutional
investment behavior. Our findings hold across different groups of REITs (e.g.
high and low institutional ownership, S&P and non-S&P REITs) and property types.
We also find that institutional real estate investor sentiment introduces a nonfundamental
component into REIT pricing.