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Technical, Allocative and Scale Efficiencies of REITs: An Empirical Inquiry

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  • John C. Topuz
  • Ali F. Darrat
  • Roger M. Shelor

Abstract

This paper empirically explores various efficiency aspects of Real Estate Investment Trusts (REITs) in light of their remarkable growth in the 1990s. We find clear evidence of considerable technical inefficiency in REITs, though not much indication for allocative or scale inefficiency. The results also suggest that an increasing number of REITs has been operating under diseconomies of scale since the late 1990s primarily due to the recent wave of consolidation and merger activities. As creatures of the US tax code, REIT's have undergone several changes to their operating status, and our results suggest that the prevalent regulatory environment appears too onerous for the industry and may have contributed to the REITs’ poor efficiency performance. In particular, further cuts or total elimination of the dividend restriction on REITs could provide much needed relief and stability in the US real estate market.

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  • John C. Topuz & Ali F. Darrat & Roger M. Shelor, 2005. "Technical, Allocative and Scale Efficiencies of REITs: An Empirical Inquiry," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1961-1994, November.
    • Handle: RePEc:bla:jbfnac:v:32:y:2005:i:9-10:p:1961-1994
    DOI: 10.1111/j.0306-686X.2005.00653.x
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    Cited by:

    1. Mustafa Kemal Yilmaz & Ali Osman Kusakci & Ekrem Tatoglu & Orkun Icten & Feyzullah Yetgin, 2019. "Performance Evaluation of Real Estate Investment Trusts using a Hybridized Interval Type-2 Fuzzy AHP-DEA Approach: The Case of Borsa Istanbul," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 18(06), pages 1785-1820, November.
    2. Badunenko, Oleg & Fritsch, Michael & Stephan, Andreas, 2008. "Allocative efficiency measurement revisited--Do we really need input prices?," Economic Modelling, Elsevier, vol. 25(5), pages 1093-1109, September.
    3. Ahmad, Usman, 2011. "Financial Reforms and Banking Efficiency: Case of Pakistan," MPRA Paper 34220, University Library of Munich, Germany.
    4. Changha Jin & Kwanyoung Kim, 2017. "Do Economies of Scale Exist? : Evidence from Korean REITs," International Real Estate Review, Global Social Science Institute, vol. 20(3), pages 349-374.
    5. Gogineni, Sridhar & Jain, Pawan & Upadhyay, Arun, 2024. "Global REIT regulations and valuation," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 152-166.
    6. Michael J. Highfield & Lily Shen & Thomas M. Springer, 2021. "Economies of Scale and the Operating Efficiency of REITs: A Revisit," The Journal of Real Estate Finance and Economics, Springer, vol. 62(1), pages 108-138, January.
    7. Ruoran Xu & Joseph T. L. Ooi, 2018. "Good Growth, Bad Growth: How Effective are REITs’ Corporate Watchdogs?," The Journal of Real Estate Finance and Economics, Springer, vol. 57(1), pages 64-86, July.
    8. Mohammad Nourani & Qian Long Kweh & Wen-Min Lu & Ikhlaas Gurrib, 2022. "Operational and investment efficiency of investment trust companies: Do foreign firms outperform domestic firms?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-26, December.
    9. Chen, Kun & Song, Yao-yao & Pan, Jiao-feng & Yang, Guo-liang, 2020. "Measuring destocking performance of the Chinese real estate industry: A DEA-Malmquist approach," Socio-Economic Planning Sciences, Elsevier, vol. 69(C).
    10. Julia Freybote & Lihong Qian, 2015. "The impact of asset location on REIT merger decisions," Journal of Property Research, Taylor & Francis Journals, vol. 32(2), pages 103-122, June.
    11. Nor Nazihah Chuweni* & Ihsan Isik & Ahmad Shazrin Mohamed Azmi, 2018. "Productivity, Technology and Efficiency Change of Islamic and Conventional Reits in Malaysia," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 382-389:6.
    12. Mansley, Nick & Wang, Zilong & Weng, Xiaoyu & Zhang, Wenjing, 2023. "Good growth, bad growth: Market reaction to capital raising for REIT expansion," International Review of Financial Analysis, Elsevier, vol. 86(C).
    13. Yang, Guo-liang & Fukuyama, Hirofumi & Chen, Kun, 2019. "Investigating the regional sustainable performance of the Chinese real estate industry: A slack-based DEA approach," Omega, Elsevier, vol. 84(C), pages 141-159.
    14. Qayyum, Abdul & Ahmed, Munir, 2006. "Efficiency and Sustainability of Micro Finance Institutions in South Asia," MPRA Paper 85467, University Library of Munich, Germany, revised 2014.
    15. Isik, Ihsan & Topuz, John C., 2017. "Meet the “born efficient” financial institutions: Evidence from the boom years of US REITs," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 70-99.
    16. Hui Chen Chiang & Yih Ching Tsaih & Wen-Cheng Hsiao, 2016. "The Efficiency Analysis Of Singapore Real Estate Investment Trusts," Eurasian Journal of Business and Management, Eurasian Publications, vol. 4(4), pages 9-20.

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