Portfolio listed REITs, although increasingly popular among institutional investors, are mostly held by only a few institutional blockholders. So what effect does this clustering have on REIT stock price performance? Dirk Brounen, Nils Kok and David Ling report

Over the past three decades, listed real estate markets the world over have matured into an asset class that has tempted institutional investors to build up their real estate exposure conveniently using their exchange listings. Over time, some of these investors have evolved into blockholders that possess significant stakes of individual REITs. But being popular could come at a price.

Having large blockholders reduces the trading liquidity of stocks and this might eventually affect stock performance of real estate funds over the long term. In this study we analyse stock price movement of listed real estate stocks during the most volatile trading days of 2008 and 2009 to find out whether it pays off to have big investors versus a more dispersed shareholder base.

REITs are hot. During the past 15 years the REIT market has grown more than 10-fold both in size and numbers. And as the stock market capitalisation of public-traded property companies has increased, so too has the institutional ownership of property shares.

At the end of 2010, institutional investors and company insiders held more than 80% of US REIT shares, up sharply from the late 1990s when institutions and insiders owned approximately 40% of outstanding US REIT shares. These stakes grew as the holdings of smaller retail investors diminished as declining dividends and rising volatility drove many individual shareholders out of the public real estate market.

Nevertheless, some public real estate company executives have indicated a preference for increased ownership of their stock by individual (retail) investors. For example, Leo Ullman, chief executive of US mall owner Cedar Shopping Centers, has stated that he "would love to see more retail because I think it's more consistent ownership and potentially less dislocative when people decide to get out".

Figure 1 shows the dispersion of shareholdings for our sample of international REITs. The numbers show the aggregate percentages of outstanding shares that are held by the largest (top 1), three largest (top 3), five largest (top 5), and 10 largest (top 10) shareholders of each individual REIT. The numbers relate to the year-end of 2010 and are obtained from Thomson's Ownership Module. These results show that in all five markets the five largest REIT shareholders together hold more than 40% of the shares outstanding. In other words, only 60% of the market capitalisation of the REIT is available to the residual investor audience. For France, these numbers are even more staggering, since the largest five shareholders own almost 60% of the average REIT, leaving the minority to all the other investors.

Institutional investors come in various shapes and styles. Before, we look into the performance of the shareholder base, we first need to examine the composition of these blockholders across investor types. Figure 2 shows that asset managers are responsible for most of the institutional ownership. Perhaps more surprising is the dominance of hedge funds. On average, more than 16% of REIT institutional ownership is in the hands of hedge funds. Especially in the UK and US these stakes are high at times. The more conventional long-term investor types such as pension funds and insurance companies are a small minority for most REITs.

The shareholder base matters. In the second part of our analysis we studied the stock price behaviour of REITs in relation to the size of different blockholders. In other words, we asked: who blinks when the going gets tough? Is there more trading on bad days when stock ownership is dispersed? Or do blockholders have as itchy trigger-fingers as some retail investors?

We tracked the REITs in our international samples during the 25 most dramatic trading days of 2008 and 2009. During these days the overall national stock markets lost more than 4% on a single day of trading. For each REIT, we study both the trading volumes and resulting stock price movements and relate both to the shareholder base characteristics of the REIT. The results show us two things.

During turbulent stock market days, REITs with blockholders trade more than REITs with a more dispersed shareholder base (figure 3a). This implies that blockholders are not as loyal as one might think. When considering the type of investors that own these blocks of shares, we find that mostly the hedge funds are happy to trade during volatile days.

A phenomenon that is strongest in France and the US, however, is that insurance companies appear to be holding on to their stock. Where insurance companies are the blockholder of a REIT, trading is up to 2% less than where insurance companies are less dominant in the shareholder base.

Furthermore, we also find that these patterns in trading affect stock pricing (figure 3b). If insurance companies own a lot of stock, return on bad stock days will be around 0.5% higher than otherwise. If, however, your shareholder base consists of a lot of hedge funds, the return is 3% more.

Demonstrably, it is important to know your shareholders; they can dampen and spike your returns, especially on volatile days.

Dirk Brounen is -professor of real estate economics, University of Tilburg; Nils Kok is visiting scholar, University of California, Berkeley; David Ling is McGurn professor of real estate, University of Florida