“Do Institutional Investors Trade on Mispricing? Evidence from Real Estate Markets”
ABSTRACT: This paper focuses on the relationship between stock prices and net asset values (NAV). By investigating two prevailing sets of proprietary NAV data on asset holdings for real estate investment trusts from Green Street Advisors and S&P Global Market Intelligence (formerly the SNL Financial dataset), we find that stock prices deviate substantially from their NAV. A long-short strategy based on the premium to NAV yields about 1% return per month. Due to the high institutional ownership in public real estate markets, we then exam whether institutional investors are rational and whether they trade against mispricing. The evidence contradicts the sophisticated institutional investor hypothesis. We find that institutional investors tend to buy overvalued stocks and sell undervalued stocks. Furthermore, our results may shed light on popular asset pricing anomalies. By checking the premium to NAV of anomaly portfolios, we conclude that the ranking of momentum and earning surprises can be used as a proxy for mispricing in public real estate markets.