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Executive Summary.
Residential real estate investment trusts (REITs) make a significant contribution to the overall REIT market, accounting for 13.5% of the equity REIT market capitalization at December 2007. The current housing crisis in the United States has seen an increased focus on residential REITs. This paper assesses the significance of residential REITs in a REIT portfolio over Q1:1994-Q4:2007. In particular, their risk-adjusted performance and portfolio diversification benefits are compared with the other REIT sub-sectors and to stocks, bonds, and real estate. The ongoing effect of the current U.S. housing downturn on the future outlook for residential REITs is also assessed.
Residential real estate investment trusts (REITs), comprising apartment REITs and manufactured home REITs, make a significant contribution to the overall REIT market. This sees residential REITs accounting for over $39 billion or 13.5% of the equity REIT market capitalization at December 2007 (NAREIT, 2008a). In terms of market share, apartment REITs account for 8% of U.S. apartments and manufactured home REITs account for 5% of U.S. manufactured home sites (Imperiale, 2006).
While the performance of other REIT sectors (e.g., office, retail) has received considerable attention (see Zietz, Sirmans, and Friday, 2003), the significance and performance of residential REITs has received limited attention. This research has largely focused on apartment REITs and included the portfolio implications of apartment investing (Anderson, McLemore, Conner, and Liang, 2003), apartment REIT payment of premiums (Hardin and Wolverton, 1999), linkages between apartment REIT and apartment performance (Liang, Chatrath, and Mcintosh, 1996; and He, 2000) and linkages between apartment REITs and other REIT sectors (Young, 2000; and Payne, 2006).
The investment significance of residential REITs has been further considered in light of the current residential housing crisis in the U.S. and ongoing issues regarding Freddie Mac and Fannie Mae. This has been reflected in the 45% decrease in significant apartment sales in the U.S. in the first half of 2008 compared to the first half of 2007 (Real Capital Analytics, 2008). With declining home ownership and the expected trend of home owners moving into rental this has seen increased institutional investor terest in residential REITs as a potential source liquidity and added value in the residential (Schwartz-Driver, 2008).
Given this current focus on residential and the potential enhanced role of...