What determines the systematic risk of REITs?

We analyse the empirical relationships between REIT firm fundamentals and the de-
pendence structure between individual REIT and stock market returns. Our study
di↵ers significantly from prior work because we distinguish between the average sys-
tematic risk of REITs and their asymmetric risk in the sense of a disproportionate
likelihood of joint negative return clusters between REITs and the stock market.
Our approach enables us to identify those firm characteristics that enhance the
defensive qualities of a REIT in general and that, conditional on a given level of
systematic risk, improve a stock’s ability to protect portfolio value particularly in a
downturn. We find that firms with low systematic risk are typically small, with low
short-term momentum, low turnover, high growth opportunities and strong long-
term momentum. Holding systematic risk constant, the main driving forces behind
disproportionate negative return clusters between REITs and the stock market are
leverage and, to some extent, also short-term momentum. From a practical point of
view, our results promote the construction of portfolios that are better able to with-
stand a downturn. Our findings also contribute to the wider debate around the e↵ect
of leverage on REIT equity performance. We provide novel evidence that leverage
has an asymmetric e↵ect on REIT return dependence that outweighs the extent to
which it increases the average sensitivity of REIT equity to market fluctuations.