Abstract

The Canadian REIT sector has experienced rapid growth that has coincided with the strong performance of the real estate sector. Thus, this thesis examines the risk-adjusted return performance in the secondary and primary (IPO) markets and interest rate sensitivity of all non-mortgage REITS that traded on the TSX during the 1996-2004 period. Smaller REITs offer lower risk-adjusted returns since the value-weighted REIT index has about the same mean monthly return but much lower standard deviation than its equally-weighted counterpart. Based on the Sharpe ratio and the Jensen alphas, both equally- and value-weighted REIT indexes outperform the market. Although mean first-day unweighted and size-weighted IPO returns are significant and negative, the size-weighted counterparts are approximately equal to the commissions saved by new issue versus secondary market purchase. Mean mispricing in the first and not second subperiod suggests that earlier overpricing of IPOs has corrected, and that more recent REIT IPOs are approximately correctly priced on average. Consistent with studies of US REITs, Canadian REITs do not outperform (or underperform) the market during the year after initial issue. If past performance is reflective of what can be expected in the future, REITs provide investors with a "fairly" priced vehicle for participating in real estate investment. REITs are more interest-rate sensitive than other equities but the sensitivity depends upon the interest rate change proxy used. REIT returns are inversely related with bond premia. This interest-rate sensitivity has implications for the management of risk for this asset class within an investor's portfolio.