Time‐varying performance of four Asia‐Pacific REITs
| Date | 25 April 2008 |
| Published date | 25 April 2008 |
| Pages | 210-231 |
| DOI | https://doi.org/10.1108/14635780810871605 |
| Author | Chiang Yat‐Hung,So Chun‐Kei Joinkey,Tang Bo‐Sin |
| Subject Matter | Property management & built environment |
Time-varying performance of
four Asia-Pacific REITs
Chiang Yat-Hung, So Chun-Kei Joinkey and Tang Bo-Sin
Department of Building and Real Estate, Hong Kong Polytechnic University,
Hong Kong, China
Abstract
Purpose – The aim of the paper is to determine the dynamic relationships between REIT returns and
those of other financial and real unsecuritized assets internationally.
Design/methodology/approach – Using a multi-factor model the flexible least squares (FLS)
coefficients of REIT returns against stock, bond and direct property returns are derived for the REIT
markets of the USA, Australia, Japan and Singapore.
Findings – The correlation between REIT returns and those of other financial and real assets varies
not only across countries but also inter-temporally. REITs can certainly provide diversification
benefits to a multi-asset investment portfolio. However, due to the time-varying nature of the
correlation, active management is advised and REITs should be not be viewed as a complete substitute
for direct property investment.
Research limitations/implications – There are two major limitations to the study. Firstly, the
sampling periods used are not the same across the countries due to differing market maturity.
Secondly, there are also sheer differences in market sizes. However, as REIT markets around the world
continue to grow and become more mature in terms of their breath and depth, there will be a richer set
of data available for more in-depth analyses based on the methodology presented here.
Practical implications – The conclusions on both mature and emerging REIT markets could
provide some ideas for international investors as to how they should formulate their time-varying
investment strategies and reconstruct their portfolios as mature markets become more efficient and
emerging ones more mature.
Originality/value – The inclusion of Asian markets enables investigation of the correlation between
REITs and different assets in respect not only of different market conditions, but also different
geographical locations and market maturity. The international dimension of this paper may appeal to
readers and investors who are interested in identifying diversification opportunities around the globe,
especially so when the capital and property markets around the world are becoming more integrated
and globalized.
Keywords Real estate, Investments, Trusts, Leastsquare approximation, Financialrisk
Paper type Research paper
Introduction
This paper examines the dynamic relationships between REIT returns and those of
other financial and unsecuritized real assets internationally. The objectives of this
paper are:
.to identify the causes of the dynamic nature of these relationships; and
.to determine whether the relationships vary geographically.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
The authors would like to thank The Hong Kong Polytechnic University for funding this study
(project code: A-PE21).
JPIF
26,3
210
Received October 2006
Accepted April 2007
Journal of Property Investment &
Finance
Vol. 26 No. 3, 2008
pp. 210-231
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780810871605
The findings will give us insight into the predictability of REIT returns, and will help
investors and market practitioners make better informed decisions.
Literature review
The return and risk profile of REITs has interested both academics and practitioners.
Generally speaking, REITs are believed to have a volatility in between direct property
and stock, and so their average return (for a comprehensive review of 128 papers on
returns and risk on real property and REITs, see Benjamin et al., 2001; for another
comprehensive review of 240 studies on REITs in particular, see Zietz et al., 2003,
which extends the work of Corgel et al., 1995). Han and Liang (1995) covered a period
between 1970 and 1993 and concluded that the performance of REITs was “similar to
that of a passively managed portfolio consisting of three-month Treasury bills and a
stock market portfolio”. Further, as an asset class, REITs provide not only a “middle of
the road” alternative for investors, but also serve as a diversifying asset in a
multi-asset portfolio. Chiang and Lee (2002) consider the REIT to be a class of its own,
which should be included as a diversifying asset in a multi-asset portfolio “even when
unsecuritized real estate is a viable investment”. Lee and Stevenson (2005) add that the
diversification benefits increases as the holding period increases.
However, we need to understand the time-varying nature of the return relationship
between REITs and the other assets before we can construct an optimal portfolio that
also includes REITs. Chen and Peiser (1999) found that over a four-year period between
1993 and 1997, the relations between REITs and the stock market were not strong. The
beta of equity REITs under capital asset pricing model analysis is generally very low,
suggesting that REITs are exposed to risk factors different from stocks in the USA.
Wang et al. (1995) attempted to explain the weak relation. They attributed the different
behaviour of REITs vis-a
`-vis stock to market efficiency. The stock market does not
“provide the same level of services, such as information dissemination, monitoring
activities and the pricing mechanism, for REIT stocks as it does for other stocks in the
market”. Kuhle and Alvayay (2000) also suggested “a degree of inefficiency in REIT
prices”. They applied runs and autocorrelation tests to the prices of 108 randomly
selected equity REITs between 1989 and 1998. However, in a more recent study,
Jirasakuldech and Knight (2006) covered a much longer period, from 1972 to 2004.
Based on serial correlations, variance ratio tests and a non-parametric runs test, they
concluded that market efficiency had increased over time for both equity REITs and
small cap stocks. However, as they also rightly pointed out, efficient or not, it is the
correlation with other assets or the marginal contribution of risk that should be
considered when REITs are to be included in a mutli-asset portfolio, echoing the
similar view of Seiler et al. (1999). There appears to be some recent evidence suggesting
that REITs have correlated more with direct property than stocks, making REITs “a
liquid means of adding exposure to the unsecuritized property market” (Jirasakuldech
and Knight, 2006).
As the REIT market becomes mature, some argue that the risk return profile of
REITs will become more like that of direct property than stock. When the REIT market
becomes more information efficient, REIT prices will more accurately reflect the
fundamentals of its underlying assets, i.e. direct property. Khoo et al. (1993) found a
structural change in equity REIT betas, which decreased in the 1980s with respect to
the equity market due to improvements in REIT information efficiency. Conover et al.
(2000) established that between 1978 and 1994, the beta alone was a significant factor
Asia-Pacific
REITs
211
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