Volume 29, Number 1, 2007 of the Journal of Real Estate Research
Extrapolation
Theory and the Pricing of REIT Stocks
Joseph T.L. Ooi
Department of Real Estate
School of Design and Environment,
National University of Singapore
4 Architecture Drive, Singapore 117 566
E-mail: rstooitl@nus.edu.sg
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James R. Webb
Department of Finance
College of Business,
Cleveland State University
Cleveland, Ohio 44115
E-mail: j.webb@csuohio.edu |
Dingding Zhou
Department of Real Estate
School of Design and Environment,
National University of Singapore
4 Architecture Drive, Singapore 117 566
E-mail: rstooitl@nus.edu.sg |
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Abstract: This paper is
the winner of the best paper on Real Estate Investment Trusts award
(sponsored by the National Association of Real Estate Investment Trusts
(NAREIT)] presented at the 2005 American Real Estate Society Annual
Meeting.
This study evaluates the investment prospects of value stocks in the
real estate investment trust (REIT) market. Value stocks are defined as
those that carry low prices relative to their earnings,
dividends, book assets, or other measures of fundamental value. The
empirical results show that from 1990 onwards, value REITs provide
superior returns without exposing investors to higher
risks. The evidence is consistent with the extrapolation theory, which
attributes the mispricing to investors over extrapolating past corporate
results into the future. Interestingly, the findings reveal that such
extrapolation is asymmetric in the REIT market. While value REITs are
underpriced in accordance with the extrapolation theory, no evidence is
found that growth REITs are overpriced. The value anomaly also exhibited
several temporal traits. Firstly, the value premium varies over time.
Secondly, the magnitude of the premium is inversely associated with the
market performance. Finally, the value anomaly is not evident in the
pricing of REITs in the 1980s.
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