Ownership Dynamics of REITs
ROBERT H. EDELSTEIN
Haas School of Business, University of California, Berkeley, CA 94720-1900, USA
The Faculty of Economics, University of Belgrade (Belgrade, Serbia), Department of Economics and Business,
Universitat Pompeu Fabra, 25-27 Ramon Trias Fargas, Barcelona 08005, Spain
College of Business and Economics, Western Washington University, Bellingham, WA 98225-9073, USA
This paper studies the effects that beneﬁts of control and moral hazard have on the evolution of large stakes in
REITs. A large risk-averse shareholder trades off the net beneﬁts of REIT business monitoring and control with
the cost of bearing risk beyond the level compensated by the REIT return premium. In equilibrium, the large
shareholder gradually adjusts his ownership shares level (as long as his marginal beneﬁts from holding shares
increase in his REIT stake) towards the long-run competitive equilibrium in which his marginal share valuation
coincides with that of the market. Because of the moral hazard, such level of ownership (and monitoring) is, in
general, inefﬁcient. The speed of adjustment is positively correlated with the agent’s risk aversion and company
volatility, and negatively correlated with his marginal beneﬁts of control and beneﬁcial monitoring effects.
Key Words: real estate investment trusts, corporate stock ownership, real estate returns, stock market price
The 1990’s witnessed signiﬁcant changes in REIT ownership and control structures:
extensive formation of UPREITs, a wave of REIT mergers and the aggressive asset
acquisitions by existing REITs. As a result of these events, one or more individuals often
emerged with large ownership shares in the REITs. Such individuals typically face a
tradeoff between the reduction in their private beneﬁts of control as well as the reduction
of the beneﬁts of their business monitoring of the REIT on one hand, and the cost of
holding a less diversiﬁed investment portfolio on the other.
This paper presents a theoretical framework for determining the optimal ownership
path that a large risk-averse REIT shareholder would take, given the trade-offs he is
facing. We study an economy in which there are two assets: a risk-free asset and a REIT
whose dividend ﬂow is inﬂuenced by the ownership stake of a single large stakeholder
(the agent) and whose private beneﬁts of control may depend on his stake in the REIT. In
equilibrium, the model simultaneously determines the agent’s ownership dynamics and
the market pricing of REITs shares.
The Journal of Real Estate Finance and Economics, 30:4, 447–466, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.