Underpriced REITs: The Long & The Short of It

Effective and efficient decision making relies upon asset pricing models. Over the past 25 years, these models have increased markedly in their sophistication from the classic single-factor (CAPM) market model to an ever-expanding array of new tools and techniques incorporating multiple risk factors. Among these, Stambaugh et al. (2012) propose a composite metric that incorporates many previously identified anomalies into a single measure. This increasingly common control in the broad investment literature is beginning to find its way into the real estate field. In this paper, we provide a detailed description of the data and methodology necessary to use the composite metric (CM) in REIT research. Additionally, we present evidence that while CM exhibits predictive power over REIT returns, the principles underlying its predictive power are different than those observed in traditional non-REIT equity markets. More specifically, unlike in the broad investment literature where CM is found to identify only over-price securities, in the REIT market CM identifies REITs which are both overpriced and underpriced.