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The market has traditionally consisted of real estate operating companies (REOCs), but, during the past few years, an increasing number of European countries have adopted legislation regarding real estate investment trusts (REITs), pass-through entities which distribute most of their earnings as dividends to shareholders (Brounen et al., 2009a).
Moreover, of interest is to study the potential implications of the structural differences between the two: REOCs are free to invest their assets as best deemed, whereas the distribution requirements of REITs make internal growth rather challenging.
Thus, the liquidity characteristics of European REITs and REOCs, and possible differences therein, are addressed in the paper.
Now, a clear distinction between European REITs and REOCs has to be made: In order to qualify as a REIT, a real estate company must fulfil certain requirements set forth in national legislation.
Eichholtz and Kok (2007) argue that leverage restrictions put REITs into a disadvantageous position in comparison with other property investments: The amount of debt allowed in REIT operations is restricted unlike in the case of REOCs. REIT specific shareholder requirements are set forth to ensure a proper use of REIT structure and share liquidity; companies with tax transparent structure often have to comply with certain shareholder requirements.
As can be seen, REITs and REOCs operate in very different operational environments.
Of the 366 listed real estate companies nearly two thirds are set up as REOCs (239 companies) and a third as REITs (127 companies).
REOCs' ability to retain earnings allows greater growth opportunities without additional external funding.
However, it should be noted that the majority of the studies carried out using US data only concern REITs, and not REOCs. Un the contrary, the European studies mainly address issues regarding REOCs, and not REITs.
As discussed, the vast majority of the preceding research on public real estate returns has typically been focused on analyzing either REITs or REOCs, not both.
Even though both REITs and REOCs invest almost exclusively in real estate related assets, REITs and REOCs seem to have different systematic risk levels: The authors claim REOCs exhibiting higher levels of systematic risk.
The broad stock market went through a serious down cycle during the study period: Therefore again, of primary interest are the relative characteristics of REOCs and REITs (and other assets), not the nominal values the variables have been exhibiting per se.