Nº 22-08: Tenant Industry Sector and European Listed Real Estate Performance

This paper is the first to examine the relationship between the performance of public real estate companies (PRECs) and the industrial sector of their tenants. By investigating the performance of a large sample of European real estate firms from 2010 to 2019 and information pertaining to the firms' tenants, we find that the systematic risk in the tenants' industry sectors is priced in real estate company equity returns. Our results stay robust after correcting for selection bias, stock beta modifications, tenant sector alpha, and tenant anchor effects. We propose a long-short hedging strategy that buys the stocks with high tenant sector risk and sells the stocks with low tenant sector risk, which can earn a non-market return of 3.53% annually.