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This paper employs empirical data in three major Asian real estate markets - Hong Kong, Japan, and Singapore, from 2001 to 2021, to study the leverage strategies of two related types of real estate companies – real estate investment trusts (REITs) and real estate operating companies (REOCs). The business model of the former must adhere to a real-estate-focused investment strategy while the latter undertakes a whole range of real estate development activities including land acquisition, financial feasibility analysis, construction, investment and asset management to redevelopment and disposal, and are not subject to the REIT rules with respect to tax transparency, earning distribution, real estate holding and leverage limit. We find that REOCs use 18.96% more debt than REITs after controlling for the agency and market risks, dividend yields, and property sector, country, and year fixed effects of firms; dividend payout has no effect on the leverage strategies; and high tax ratio increases the debt usage of REOCs relative to REITs. We also analyze the liquidation costs and business uniqueness effects. We find real estate value to total firm value ratio, as a proxy of liquidation cost, has negative effects on debt ratios for both real estate firms. Due to their uniqueness, REOCs with a high concentration of rental revenue stream are more vulnerable to liquidation risks, and thus more likely to have lower debt ratio. REITs however tend to have higher debt usage as rental incomes enhance cash-flow liquidity.
Chang et al. (Sat,) studied this question.