Capital Expenditures and the Property Cycle: Evidence from Real Estate Investment Trusts

Recent research finds a disposition effect in REIT property holdings. We propose a value-add investment strategy as an alternative explanation. The main value-add mechanism in property investment is capital expenditure (CAPEX). However, CAPEX is a real option whose exercise depends on its moneyness, which is a function of the economic environment. We will study the drivers and implications of variation in REIT CAPEX through the property cycle to explore the empirical evidence for the proposed rational explanation for the alleged disposition effect in REIT property holdings. Our results may also guide practitioners in their choice of an optimal CAPEX reserve.

March 2016 

August 2015