Real Estate, Governance, And The Crisis

Real estate has been at the forefront of the financial crisis, with the intransparency of securitized products, such as MBS, CMBS, and CDOs, playing a critical role. Real estate equity investments have received less attention during the crisis. Listed property companies (REITs) offer an interesting perspective on the behavior of institutional investors in the real estate equity market. In this chapter, we study the influence of the recent crisis on the relation between corporate governance and the performance of listed property companies in the U.S. We first investigate the effect of corporate governance structures on abnormal stock returns during the pre-crisis period, and then address the effects of the financial crisis on this relationship, during the recent period of economic distress. We find that firm-level corporate governance did not influence performance of real estate equity investments before the crisis, but the structure of corporate governance has become an important performance driver of real estate equity investments during and after the market downturn. One of the interpretations is that institutional investors have just started to recognize the importance of transparency in real estate equity investments during the recent crisis, which is fully consistent with the herd investments in securitized debt products, where opacity of the investments was so blissfully ignored.