UK REIT conversion and institutional ownership dynamic

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.