Author: Sung Won Suh

Publisher:

Published: 2016

Total Pages: 92

ISBN-13:

This study aims to explore the impact of capital flows on private and public real estate funds. I bring together work on capital flows, private equity fund performance, and REIT liquidity management to examine the effects of capital flows on real estate markets in the fund level rather than in the aggregate market level with special attention to two sets of relations: 1) the effects of cross-sectional variation of capital flows on returns of private equity real estate funds; 2) the effects of inter-temporal variation of capital flows on the liquidity managements of REITs. In regards to private equity real estate funds, I find that differential fund growth created by heterogeneous institutional investors determines persistence in fund performance. Utilizing a novel Preqin's data, I develop a data set that shows which type of investors participate in individual private equity real estate funds from 1995 to 2009. The results provide strong evidence that underlying heterogeneity in the sophistication of institutional investors leads to heterogeneity in fund performance and to more performance persistence if sophisticated investors invest in. The funds invested in by sophisticated investors have a weak fund sizeperformance relation and show strong performance persistence, while the funds invested in by unsophisticated investors have a strong fund size-performance relation and no performance persistence. Regarding REITs, I find that financially constrained REITs respond to the inter-temporal variation of capital flows, which is represented by time-varying financing conditions, by changing policies on seasoned equity issuances and credit lines. The results show that the timevarying financing conditions primarily affect the liquidity policies of financially constrained REITs that heavily rely on equity offerings for their liquidity source, but not those of unconstrained REITs that can access relatively diverse funding sources other than equities. The results also suggest that tight financing conditions lead constrained REITs to rely more on equity offerings to repay their credit lines because constrained REITs reserve a large portion of the offering proceeds as an unused credit lines to prepare for unfavorable financing conditions. In addition, the time-varying financing conditions alter the order of accessing credit lines and seasoned equities. As finance costs rise, constrained REITs are more likely to utilize credit lines after raising equities rather than prior to the offerings. This is quite contrary to the traditional bridge loan hypothesis which suggests that REITs prefer to utilize credit lines first in the recession and pay off the drawdown of credit lines later during favorable credit market conditions.