Systematic Risk and Diversification in the Equity REIT Market

This paper employs stock market-based data to examine the systematic risk and diversification properties of publicly traded equity real estate investment trusts (REITs). A unique sample is created by combining returns with property holdings by type and location. We find that: (1) the systematic risk of equity REITs varies by property type, with betas being significantly larger for retail-oriented REITs than for REITs owning industrial and warehouse properties; (2) we find no evidence that diversification across property types or broad geographic regions is reflected in a standard market-based diversification measure- -the R-squared from a simple market model regression; but (3) the number of properties owned by the REIT is positively correlated with the market model R-squared; a REIT's stock return variance of total return also is systematically lower the greater the number of properties owned by the firm