Time-Varying Betas of US REITs from 1972 to 2013
Tien Foo Sing1 & I-Chun Tsai 2 & Ming-Chi Chen3

Abstract

This study estimates the time-varying REIT betas with a structural
time series model using monthly REIT return data for the periods from 1972 to
2013. Based on the FTSE-NAREIT return indices for the equity REIT (EREIT)
and mortgage REIT (MREIT), we found corroborative evidence of the temporal
declines in the betas of the two REITs up to 1999. The time-varying beta
characteristics of the two REIT betas are fundamentally different in the 2000s.
While the MREIT betas continued to decline, the EREIT betas showed a sharp
reversal of the downward trend. Coinciding with the low interest regime in the
US, EREITs used more external debt to fund new acquisitions and development
activities, and as a result, the EREIT betas increased sharply in 2000s. The
EREIT betas hit the peak in 2009; and declined thereafter when active
deleveraging occurred in the market. Using firm level data, we construct two
leverage-sorted EREIT portfolios, and our empirical results do not reject the
leverage effects on time-varying EREIT betas. However, we find that the
leverage effect is not triggered by the declines in stock prices as proposed in
the finance literature.