What Determines REIT Returns in Turkey? An Application of Time-Varying Arbitrage Pricing Model in an Emerging REIT Market

This paper investigates the macroeconomic sources of time-varying risk premia in Turkish REIT industry within the arbitrage pricing theory framework. Turkish REIT industry differs substantially from the global REIT market as Turkish REITs do not have to pay out dividends, yet enjoy the exemption from paying corporate taxes, and have highly concentrated ownership structure. These fundamental differences have significant impacts on the performance of REITs compared to other stocks listed on Borsa Istanbul (BIST), especially in terms of the inflationhedging characteristics and time-varying systematic risk behaviour. This article evaluates the Turkish REIT industry by using a time-varying multifactor model, which compares the REIT industry excess returns with various macroeconomic factors, including GDP growth, industrial production growth, inflation risk premium, and stock market risk premium. Our results provide the evidence of time-varying linkages among macroeconomic risks and the conditional first and second moments of excess returns on REITs. We find that among the macroeconomic factors, inflation risk appears to be the major concern in REIT investment. Additionally, Turkish REITs behave more like stocks than real estate. The documented perverse inflation hedges of REITs, the positive correlation between REIT returns and volatility of real economic activity, and the significant influence of ISE equity risk premium on REIT returns can be quoted as the indications of deviation of REITs’ performance from real estate performance. If REITs behave more like stocks than real estate, the diversification benefits of having REITs in a multi-asset portfolio is seriously reduced.