Banking Relationships and Financial Decisions of REITs

Abstract

Banking relationships are key factors influencing financing decisions of real estate investment trusts (REITs) that are mandated to hold highly specific assets. Using a comprehensive data set of loan facilities by REITs across different markets, this paper empirically tests the effect of REIT-bank relationships on credit costs and other non-price credit terms. We find that REITs with past banking relationships enjoy favourable loan terms that include lower loan rates, higher loan amount, and a less stringent collateral requirement. These favorable terms were kept by relationship banks during the Global Financial Crisis from 2007 to 2009.