Dedicated REIT Mutual Fund Flows and REIT Performance

This study examines the effects of weekly and monthly capital flows into the dedicated REIT mutual fund sector on aggregate REIT returns and, simultaneously, the effects of industrylevel REIT returns on subsequent REIT mutual fund flows. The dynamic relation between REIT capital flows and returns is estimated using vector autoregression (VAR) techniques. Unlike static regression techniques, our dynamic model produces estimates of the short-run relationships, long-run relationships, impulse response functions, and forecast variance decompositions. We find evidence that REIT mutual fund flows are significantly and positively related to prior returns, while prior REIT mutual fund flows do not significantly influence REIT returns. However, contemporaneous flows do appear to have an initial positive effect, which is partially reversed one period later. The positive contemporaneous effect, moreover, is the result of unexpected REIT mutual fund flows, while the expected portion is insignificant. Our mutual fund flow data were supplied by AMD Data services. We would especially like to thank Mark Roberts, Director of Investment Research at INVESCO Real Estate, for his assistance and the Real Estate Research Institute for providing partial funding for this project. We also thank Will Goetzmann and the participants at the AREUEA meetings in San Diego, California for helpful comments and suggestions. Finally, we thank Milena Petrova for excellent research assistance.