Turning Risk into Opportunity: REIT Performance During Uncertain Times

This paper examines the impact of Economic Policy Uncertainty (EPU) on the performance of equity real estate investment trusts (REITs), using EPU as a proxy for economic risk. We document a unidirectional relationship: changes in EPU are contemporaneously associated with equity REIT returns and significantly predict returns over the following months. However, the effect dissipates beyond a 6-month horizon. A decomposition of EPU into four components shows that the predictive power is primarily driven by the NEWS component, emphasizing the role of policy-related media coverage in shaping investor sentiment and market behavior. The observed return reversal is unique to REITs and does not extend to mortgage REITs or the broader equity market. Event study analyses further highlight the profitability of trading strategies based on equity REIT exchange-traded funds (ETFs), underscoring the practical relevance of the findings. This study offers new insights for investors managing REIT portfolios amid heightened economic uncertainty.