Journal of Real Estate Finance and Economics, 29:1, 79±97, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Development Involvement and Property Share
Performance: International Evidence
Erasmus University Rotterdam, Rotterdam, The Netherlands
University of Maastricht, Maastricht, The Netherlands
This paper concerns the dilemma whether regulators should preclude tax-exempt property investment
companies from engaging in property development activities. We analyze the economic effects of combinations
of property investment and property development by looking at the performance of an international set of
property investment companies with varying degrees of involvement in property development. We study the ®ve
most important listed property markets in the world: the United States, Hong Kong, Australia, the United
Kingdom and France. We examine the extent to which property investment companies participate in
development projects by dividing the book value of their development projects by total assets. These
development ratios yield remarkable differences both within and across national samples, with national averages
varying between 2.23 percent for the United States and 21.34 percent for our Hong Kong sample. Analysis of
property share performance yields results that consistently indicate that the cluster of property companies most
involved in development projects is associated with both the highest total return and the highest systematic risk.
We also ®nd a weak positive link between development involvement and the Jensen alpha of property shares.
The statistical signi®cance of this link varies by country, with strong results for Hong Kong and Australia and
less compelling results for the United States, the United Kingdom and France. Besides analyzing the stock
performance of the companies in our samples we also focus on their operational pro®tability. Again, we
consistently ®nd both the highest and most volatile performance for companies actively participating in property
Key Words: listed property companies, property development, risk adjustment
In an increasing number of countries, property investment companies can attain a tax-
exempt status. In order to maintain fair competition with property development companies
paying corporate taxes, these tax-exempt property investment companies are very often
prohibited from involvement in development activities. For example, the legal framework
encompassing U.S. Real Estate Investment Trusts (REITs) limits the amount of real estate
development these companies can participate in. When violating these restrictions, REITs
can lose their bene®cial tax-transparent status and thereby lose a signi®cant portion of their
appeal to outside investors.