The globalization of real estate markets : Effects on efficiency and liquidity by an introduction of REITs in Sweden

Abstract: During the last decades, the features of capital markets have changed significantly where an increased globalization has led the creation of a more integrated and global market. Likewise, property investment has changed significantly with an enlarged integration with other investment classes and a broader and more international market for investments. The introduction of real estate investment trusts (REITs) has both made property markets more competitive and comparable to other main investment classes. Consequently, as more countries introduce REIT-like structures, the pressure among other countries to initiate similar structures (to take advantages of the same benefits) increases. This study consequently illustrates some of the benefits of introducing REITs. In the study, we demonstrate that liquidity of REIT-like structures has grown significantly and is frequently superior in comparison to ordinary real estate companies with similar market capitalization. Further, both efficiency tests and an observed reduction in the traditional discount to net asset value, indicates that REITs markets are more efficient and transparent. Third, the inclusion of European REITs in a mixed asset portfolio results in an outward bend in the efficient frontier, indicating an enhanced risk/return relationship. Finally we argue for an introduction of REITs in Sweden.