Why are REIT Risk Premiums Currently so High? A Beta Decomposition Perspective

The risk premiums on real estate investment trusts (REITs) have exceeded and remained higher than those of stocks since the financial crisis of 2007--2008. In this paper, we investigate the reason why. Using the Campbell-Shiller beta decomposition, we find that REIT returns are more sensitive to cash-flow risk than discount-rate risk. REIT holders are willing to sacrifice 1.08% per annum to hold the cash-flow risk of REITs rather than stocks. Since the financial crisis, the premiums for the cash-flow risk in REITs have shrunk, pushing the total amount of risk premiums upward. The increase in premiums for cash-flow risk contributes nearly 40% to the increase in the total amount, a contribution that outweighs those of the other risk factors