Determinants of capital structure in European listed real estate

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Insinööritieteiden korkeakoulu | Master's thesis
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Real Estate Investment and Finance
Degree programme
Master’s Programme in Real Estate Economics
52 + 3
This thesis examines the capital structure decisions of European listed real estate companies, more exactly Real Estate Investment Trusts (“REIT”) and Real Estate Operating Companies (“REOC”). Based on capital structure theory this study identifies the determinants of the rela-tionship between equity and debt. Further, this study investigates whether there are differ-ences in the observed capital structures of the two types of European listed real estate com-panies and explores the factors that influence capital structure. All this is done by identifying the target firm characteristics that influence managers’ capital structure decisions, using pan-el data methodology on the companies that constitute the EPRA/NAREIT European REIT and non-REIT indices 2007-2013. The examined variables include profitability, growth, tangibility, size, asset turnover and cost of debt. The research questions are divided into one main re-search question and four sub-questions. They are formulated as follows: • What are the determinants for capital structure in European listed real estate? (main question) • Are the operating preconditions the same for all types of property companies? • What are the theoretical suggestions for the behavior of capital structure? • Does capital structure differ between REITs and REOCs? • Do the capital structure determinants differ between REITs and REOCs? The results show that REITs carry less debt than REOCs, on average. This is mainly due to the tax-exempt status of REITs. The results also indicate a negative relationship between lev-erage and profitability. Also a negative relationship is found between leverage and growth. Tangibility and cost of debt are found to be positively correlated with leverage. The results do confirm the pecking order theory and the trade-off model. Also, the results show that the de-terminants for REITs and REOCs behave differently and that the determinants themselves vary.
Viitanen, Kauko
Thesis advisor
Niskanen, Jaakko
capital structure, leverage, listed real estate, REIT, REOC
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