Global Real Estate Investment by U.S. Listed REITs around Regime Changes

This paper explores the U.S. listed REIT market to provide useful information and implications for an active alternative investment of public pension funds by Korea National Pension Fund using listed REITs. The econometric model of this study begins with testing the regime changes of the stock market and major REIT sectors, and capturing the breakpoints of each regime change. Then, changes in systematic risk and idiosyncratic risk in each REIT sector are measured during a specific regime. At the same time, the effects of these risk changes on expected returns by the REIT sectors are analyzed through the applied GARCH models. In this process, we analyze the characteristics and causes of the risk–return profile unique to each REIT sector, which differs from the general stock market. Based on this, public pension funds have presented strategies and implementation measures to more efficiently reconstruct their holding portfolios focused on general stocks and bonds while overcoming various investment constraints on real estate investment and making more active investments. The main findings can be summarized as follows: First, there are some different breakpoints by sector; the regime changes occurred usually in 2008, 2010, 2011, 2013, 2015, and 2017. This suggests that each sector has a discriminatory risk-return profile by the regime. Second, the estimated betas of REIT sector are significantly different from zero, so there exists systematic risk. The betas also have a very discriminant value in each REIT sector from regime changes. Third, the changes in the risk-return profile in the REIT sector as the regime changes are clearly observed. Because of the more sensitive systematic risks of some REIT sectors than in the stock market index as regime changes, the expected return is lower than the market return under the bearish market caused by the global financial crisis. Even though the stock market is continuously bullish, the systematic risk of each REIT sector is gradually reduced, and the yields gap between the REITs market and the overall stock market continues to widen. As a result, with the overall stock market maintaining a bullish market, a steady rise in the index of a particular REIT sector will gradually reduce the dividend yield ratio as the REIT’s price rises. For this reason, except for the lodging and resorts REITs, the expected returns of most REITs are reduced as the REIT’s share price increases, slow down, and decrease in systemic risks even though the stock market index continues to rise amid the bullish market. The above findings are expected to help the LPs increase investment flexibility by expanding alternative investments using listed REITs. Also, they can be used to establish an efficient SAA strategy for various real estate investment sectors using listed REITs and to establish a reasonable TAA strategy that can reduce losses and quickly recover portfolio returns from a rebound through rapid rebalancing in the event of an emergency such as an economic crisis.