European Listed Real Estate: The Capital Structure Perspective

This paper studies the capital structure decisions of European listed real estate companies, tax-neutral REITs (Real estate investment trusts), and tax-paying entities, REOCs (Real estate operating companies). The practical implications of REITs’ tax neutral status for their capital structure are of utmost interest not only for real estate practitioners, but also for financiers, such as equity holders, banks, and other potential sources of capital. The study concludes that the tax-neutral REITs are significantly less levered than their taxed counterparts, REOCs: Along with tax neutrality, a further potential reason for the structurally less monitored REOCs’ higher leverage could be an attempt to mitigate the potential agency costs with additional debt. The observed pattern in REIT/ REOC leverage is consistent throughout the studied sample.