The real estate portfolios of institutional investors perform better when the investments are made in their own MSAs, according to a new study.
From the study, published in the journal Real Estate Economics:
We ﬁnd a strong relationship between the degree of institutional ownership and the geography of REIT property holdings. In particular, institutional investors prefer REITs that tilt their portfolios toward properties in the REIT’s home market. Institutional investors also tend to prefer REITs that hold properties in the investor’s home MSA. Our ﬁndings are robust to different model speciﬁcations, different measures of the geographic distribution of REITs’ economic interests and to types of institutional investors.We also use data on the relocation of investors’ headquarters MSAs as a proxy for a shift in the information environment. A DDD analysis indicates that investors tend to increase their ownership of REITs which have relatively large property allocations in the market to which the investor relocates. Institutional investors also tend to reduce their exposure to REITs located in the MSA in which they were headquartered prior to relocation.In our portfolio analysis, we ﬁnd that tilting portfolios toward REITs that are headquartered locally or that have a portfolio presence in the investor’s home MSA is associated with higher returns on the REIT portfolios of institutional investors. Moreover, this outperformance does not appear to be ex ante compensation to investors for holding a less diversiﬁed portfolio. On the contrary, investors appear to enjoy diversiﬁcation beneﬁts (i.e., lower idiosyncratic portfolio volatility) by holding REITs with economic interests in the investors’ home MSAs.