Public REITs' governance and regulatory structure: effects on NAV discount

Abstract

PurposeThe purpose of this paper is to investigate the influence of the Italian real estate investment trusts (REITs)' governance and regulatory structure on the market prices discount to net asset values (NAV).Design/methodology/approachThe hypothesis is that the overall regulatory design and the rules for prudential vigilance (i.e. governance rights, closed‐end form, leverage constraints, and mandatory listing) influence REITs' share value, both as market price and as NAV). In particular, the analysis focuses on the effects of the recent introduction of a shareholders' meeting in the articles of association of newly established REITs that pursues a better alignment of interests between managers and shareholders.FindingsThe original results show that the NAV discount decreases as long as time to maturity of the fund decreases. Conversely, the NAV discount is negatively affected by share turnover (as a proxy of the liquidity generated by the mandatory listing provision) and leverage. The regulatory provision of a shareholders' meeting appears to have improved the investors' governance capability having a positive impact on the NAV discount. The different sensitivity of market prices and NAVs to the regulatory variables investigated suggests the need to consider this dichotomy when defining or amending the regulatory set ruling REITs' operations and market dynamic.Originality/valueThis paper is the first in the Italian context to specifically consider the effect of the regulatory environment on the NAV discount. In particular, the effect of the regulatory provision of a shareholders' meeting has never been investigated before.