Intraday Reit Liquidity

Introduction

The unique characteristics of Real Estate Investment Trust (REIT) stocks have intrigued researchers because they are real estate investments, and yet they trade in the secondary market in the same manner as common stock. Since REITs are publicly traded, they are more liquid than a direct real estate investment; however, due to their institutional features, REITs may not be a perfect substitute for conventional equity. For example, REITs must pay out 90% of their earnings as dividends to avoid double taxation. ' This requirement limits managerial discretion and suggests that REITs may have a lower level of asymmetric information and therefore different risk characteristics than common stocks. These different characteristics may provide additional diversification benefits and stability to common stock portfolios, thus increasing the attractiveness of REITs to general investors. Any diversification benefits, however, must be weighed against market microstructure differences (due to REIT characteristics) that translate into higher trading costs. Specifically, liquidity is one microstructure element where differences between REITs and common stocks may arise.

A detailed examination of liquidity differences between REITs and common stocks is important for two reasons. Real estate investors may be satisfied with the improved liquidity of their REIT investments compared to direct real estate investments, but this contentment may be short-lived if REIT stocks are not as liquid as othe...

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