Abstract This study compares the valuation of REITs and non-REITs, using firm-level return and accounting data of 168 REITs and 3,215 industrial companies and the methodology of Vuolteenaho (2002) that separates variances driven by cash flow news and expected return news. The evidence shows that, relative to industrial firms, REITs are driven more by cash flow risk. However, the difference in cash flow risk is insignificant after controlling for leverage. Furthermore, in poor market conditions the valuation of REITs is closer to that of non-REITs, a result we interpret as evidence of a leverage effect. These results point to leverage as an important driver of cash flow risk. In addition, cash flow risk of small firms is found to be on average lower than that of larger ones.