The Consequences of REIT Index Membership for Return Patterns

We study the impact of S&P index membership on REIT stock returns. Given the hybrid nature of REITs, their returns may become more like those of other indexed stocks and less like those of their underlying properties. The existing literature does not offer clear predictions on these potential outcomes. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns after controlling for the stock characteristics that determine index membership. We also document that index membership enhances the link between REIT stock returns and the performance of the underlying real estate, consistent with improved pricing efficiency. REIT investors appear to be able to enjoy the benefits of improved visibility and liquidity associated with index membership as well as the exposure to underlying real estate markets and the related benefits of diversification.