Property development activities: value creation or distraction for REITs?

Abstract

PurposeThis 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/approachThis 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.FindingsDevelopment 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 implicationsOur 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/valueThis paper raises overbuilding as a potential cause of the underperformance of the REIT sector during the GFC.