Journal of Real Estate Finance and Economics, 21:3, 263±278, 2000
# 2000 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Determinants of REIT Institutional Ownership:
Tests of the CAPM
SCOTT D. BELOW
School of Business, East Carolina University, Greenville, NC 27858-4353 (252) 328-6365
STANLEY R. STANSELL
School of Business, East Carolina University, Greenville, NC 27858-4353 (252) 328-6636
School of Business, East Carolina University, Greenville, NC 27858-4353 (252) 328-6796
This study examines the determinants of institutional investment demand for REIT common stock. We estimate
the demand function for ®nancial institutions using the mean return and CAPM risk measures (beta and standard
error) for REIT stocks. The objective is to determine whether institutional investment decisions are in¯uenced by
CAPM model attributes. In addition, we examine the predicatability of REIT institutional ownership based on the
factors in our model. We employ conventional OLS forecasting techniques, as well as two neural network models
in order to deal with possible nonlinearities in the relationships.
Key Words: REIT, institutional ownership, institutional investment decisions, CAPM
Despite rapid growth in the institutional ownership of REITs, relatively few studies have
examined the determinants of institutional demand for REIT common stocks. Theory
suggests that institutional demand should be a function of the CAPM risk-return attributes
of individual REIT stocks. The assumptions of the CAPM imply that investors should hold
diversi®ed portfolios, and it is often argued that institutional managers make investment
decisions based upon an investment's marginal impact upon such a diversi®ed portfolio.
This raises some interesting questions with regard to REITs, particularly since real estate
assets have always been viewed as vehicles of diversi®cation
The objective of this study is twofold; (1) to examine the basic determinants of
institutional investor demand for REIT common stocks within the framework of CAPM
theory, and (2) to examine the predictability of REIT institutional ownership. Analyzing
institutional preferences for REITs will provide an opportunity to make comparisons to a
number of earlier studies which have examined the institutional demand for common
Address correspondence to: Scott D. Below, School of Business, East Carolina University, Greenville, NC 27858-
4353, (252) 328-6636, Fax 252-328-6664.