Quick Bio: Piet Eichholtz is professor of real estate and chair of the finance department at Maastricht University in the Netherlands. During his 15-year academic career, he has authored more than 120 papers on a variety of real estate topics, many of them focusing on REITs and listed property companies.

By Brad Case

Portfolio: In 1969 the Netherlands became the first European country to adopt REITs. Since then, many neighboring countries have passed REIT legislation. What are the prospects for the rest of Europe?

Eichholtz: The REIT structure has moved through Europe slowly. Recently, I co-authored a report analyzing the possibility of pan-European REIT legislation that would treat real estate investment consistently, regardless of which EU country the property is located in and regardless of which EU country the REIT's stock is traded in.

I'm very bullish about the EU REIT, because European investors would benefit tremendously from access to a competitive industry of REITs with coast-to-coast European real estate portfolios under unified asset management.

Portfolio: You recently discovered that REITs tend to outperform when they specialize by property type, while those specialized by geographic area underperformed. How would you explain that pattern?

Eichholtz: U.S. companies diversify regionally while specializing by property type. They learn lessons from each development and apply them to the next property. What they learn from each project can be applied to any geographic area, provided that the markets are reasonably similar.

Europe doesn't yet have pan-European tenants, but they're slowly developing. Property companies will follow the retail tenants into pan-European property markets.

The ability to specialize by property type while diversifying regionally is a significant advantage for U.S. REITs that European companies can't match under the current state-based regime. That's why the pan-European REIT is important.

Portfolio: Turning to another topic that you currently research, how do high corporate governance standards translate to better risk-adjusted performance?

Eichholtz: Investors demand transparency, and they're rewarded for it. Investors usually think of volatility—the standard deviation of returns—as the main measure of risk, but lack of transparency is an equally important measure of risk. This is because a non-transparent investment has a greater chance that the investment will be expropriated by the investment managers.

Most research on corporate governance comes down to minimizing what we call "agency problems," and the REIT approach is unique in that it has essentially solved the agency problem with respect to real estate investment.

Portfolio: Do you expect value-add or opportunistic real estate funds to produce better or worse risk-adjusted returns, after fees and expenses than listed real estate?

Eichholtz: We haven't been able to study value-add or opportunistic funds because there's no performance benchmark: their performance isn't measured until they cease to exist, and even then, they don't disclose their performance. Opportunistic funds have levered themselves so that their volatility is generally much higher. That means much of their extra "return" is just choosing another point on the risk-return tradeoff, rather than making better investments.

Aside from that, I worry about conflicts of interest in opportunity funds, because their fees are structured so that there's a great deal of upside reward for the managers but very little downside risk. That's a big incentive for more risk-taking and more trading; it also means that there's lots of potential for destroying shareholder value, or at least for creating fees without creating shareholder value. It goes back to the "agency problem"—the REIT structure solves this problem, but the opportunity fund structure really seems to exacerbate it.

Portfolio: You've studied executive compensation in listed property companies and found that executive pay tends to be linked to performance in companies with large shareholders because institutional investors and outside directors prefer compensation to be based on long-term incentives. Does that suggest that the growth in institutional investment in REITs may actually have contributed to better performance by REITs?

Eichholtz: That's a difficult question to answer, but it's very possible. We didn't test whether the gradually increasing involvement of institutional investors in the REIT industry has resulted in stronger performance—but yes, our results suggest that could be the case.

In looking at executive compensation in REITs, the result that is a bit disappointing is that the biggest factor in predicting executive compensation is company size, even though company size says nothing about maximizing shareholder value. On the other hand, the good news is that executive compensation in REITs is tied significantly to absolute and relative share performance.

Portfolio: Are REITs and listed property companies part of your investment portfolio?

Eichholtz: Absolutely. I'm a big fan of the book "The Future for Investors: Why the Tried and True Triumph Over the Bold and New," by Jeremy Siegel, and he specifically recommends investing in REITs.