Journal Article

Property Market Liquidity and Secured or Unsecured Debt

Downs, David H, Zhu, Bing, Zheng, Chen

2025

Overview

We examine whether property market liquidity impacts the choice between secured and unsecured debt. A sample of real estate investment trusts (REITs) allows us to estimate the market liquidity of a REIT’s underlying assets and the debt secured by those assets (or unsecured). Using an instrumental variables approach, we find a positive relationship between a REIT’s property market liquidity and its use of unsecured debt relative to secured debt - when a REIT has greater exposure to more liquid underlying property markets, it is more likely to rely on unsecured debt. We investigate several aspects of this relationship including the debt level, issuances, and property loan-to-value ratio. In each case, we find support for our main result. Likewise, our results are robust to (a) using alternative instruments; (b) controlling for REITs’ unencumbered assets, as well as asset quality and redeployability; (c) controlling for credit market conditions; (d) accounting for real estate market conditions; (e) excluding firms that focus on residential real estate; and (f) adding stock market liquidity. Our study highlights the importance of property market liquidity in the debt structure of REITs.