Explaining REIT returns in emerging economies: A Fama-French approach with foreign investment and political stability

We investigate the impact of the geographical investment focus of real estate investment trusts (REITs) in South Africa on their potential diversification benefits for foreign REIT investors. We focus on S.A. REITs as a laboratory as they vary in their geographical investment focus. In particular, some S.A. REITs predominantly invest in commercial real estate in South Africa while others predominantly invest in developed markets in Europe. Using the perspective of a foreign investor holding U.S. REITs, we find that S.A. REITs with foreign holdings have superior diversification benefits for foreign investors, in terms of portfolio variance and Sharpe ratio, than S.A. REITs with predominantly domestic holdings. Thus, while emerging market REITs provide diversification benefits to foreign investors, the exposure of these REITs to commercial real estate markets in developed countries further increases these benefits. Explanations include emerging country-specific risks.

Nearly all developing countries actively seek capital and technology from the advanced countries. Although private direct foreign investment (mainly in the form of multinational enterprise) is viewed with ambivalence by many developing countries, it is nonetheless true that direct investment remains a substantial source of capital and is sometimes the only source of specific technologies. Indeed, given the slow growth in official external assistance, developing countries are becoming more, not less, dependent on direct foreign investment. While disbursements of official development assistance by the OECD countries rose 43% from 1961 through 1970, direct investment flows rose almost 90% over the same period. In the later year, the flow of direct investment was more than two-fifths of all official assistance, $3.2 billion compared to $7.8 billion.1 Furthermore, the United States and other major capital exporting countries would prefer, for economic as well as ideological reasons, to channel more of their capital outflows to developing countries through private investment. It is highly probable, therefore, that developing countries will continue to rely on direct foreign investment in the foreseeable future to carry out their development programs. It is against this background that the present study seeks to identify the empirical determinants of direct foreign-investment flows in the manufacturing sectors of developing countries. Our purpose is to select from the many economic, social, and political features of a developing country those features that are critical to making that country attractive or unattractive to private foreign investors. Available empirical studies are limited

Institutional real estate investors commonly invest in real estate via investments in publicly traded real estate investment trusts (REITs). Recently, the increasing flow of investment from international investors into REITs sector come from foreign institutional investors. Foreign investors vary in sophistication, business strategy and practices, governance, and capital sources, so the handy information from media news will impact their preferences for REITs instantly. The wave of news from media has largely changed the structure of investors' information, which affect investors investment preferences (Ron and Robert 2017). The information availability and quality are important factors that influence foreign investors’ decisions in building their investment portfolios. Although foreign investors could obtain information through various sources, they face significant information disadvantage compared to domestic investors (Choe et al. 2005; Leuz, 2006; Chan et al.2008). Media from the home country of foreign investors (i.e., home media) could minimize these barriers by broadcasting in its home language and commenting on news from its home perspective. This paper aims to investigate whether foreign investors rely more on home media (than domestic media) to make their foreign investment decisions. Furthermore, institutional investors hold large ownership stakes in European REITs. The traditional view is that institutions are both long-term and passive investors (Devos et al.2013), so the institutional investors tend to find out the more efficient information. Most literature suggests that media coverage reduces the information asymmetry in financial markets (Bushee et al. 2010; Blankespoor et al. 2014) and plays a corporate governance role (Dyck et al. 2010; Dai et al. 2015). However, it is not clear whether the domestic and foreign media play a different role in providing information to foreign investors in European REITs. This paper aims to resolve the puzzle by answering that whether higher media coverage from a particular foreign country is expected to increase European REITs’ foreign ownership from that country or not. I investigate this relationship over the period from 2000 to 2017 by matching the second-rate media news with the yearly European REITs ownership data. This paper highlights the different sources of media news impact on foreign institutional investors’ ownership of European REITs, which provides important implications for European REITs...

Shariah-compliant investments can be defined as investment vehicles which meet all requirements of Shariah or Islamic law. This research is to conduct a financial analysis of Shariah-compliant real estate investment trusts (REITs) available in the Malaysian market, namely the Axis REIT, Al Aqar REIT and KLCC REIT, Singapore’s Sabana REIT and UAE’s Emirates REIT. Cross-sectional ratio analyses of financial statements are used to ascertain the performance of a company in 2013. This paper presents the preliminary research on the comparative performance of Malaysian REITs with their counterparts in 2013. Emirates REIT was the highest performer of all due to its heavy acquisition of assets in 2013 which have maximised returns to shareholders by means of dividend and share price. Sabana REIT was seen as the lowest performer due to it being severely affected by the global increases in interest rates and volatile environment in the US economy. Malaysian REIT, although not performing as well as Emirates REIT, did not fall as badly as Sabana REIT did. Each company has its own short-term and long-term strategies to maximise returns to shareholders. Hence, expectantly it will trigger more research work on the performance analysis of each property subsector as the Shariah-compliant REITs hold different property portfolios. The outcome of the research will aid decision-making by investors or fund managers on whether a particular REIT can be considered as a viable alternative investment in an investment portfolio.

The adoption of IFRS enhanced the transparency of stewardship reporting and thus improved the investment ability of countries affected. The study examined the moderating effect of institutional quality on the relationship between international financial reporting standards and foreign direct investment in Nigeria from 2012 to 2018 Institutional quality was measured by political stability and control of corruption while foreign direct investment was measured by foreign investment on equity, foreign portfolio investment on money market and foreign direct investment on trade credits. Ex-post facto research design was adopted and the Generalised Methods of Moments (GMM) was used for the analysis. The study found that with the aid of institutional quality, the IFRS has a significant effect on investment inflows in Nigeria. The study concludes that international financial reporting standards has a significant influence on foreign direct investment with strengthened institution and anticorruption efforts in Nigeria. Therefore, the study recommends that the Nigerian government should strengthen its institutional mechanisms to fully benefit from the adoption of IFRS and drive inflows of foreign direct investment.

The popularity of real estate investment trusts (REITs) as an investment vehicle and the current record-breaking performance of the stock market in the United States have triggered an increased interest in understanding how REITs perform relative to other investments. Numerous research studies examine whether REITs behave like stocks and bonds and have worked to identify factors that impact REIT returns. Others examine the asset pricing structure of various assets, including REITs, to identify predictive information useful for investors. In this study, we organize this literature into five categories and provide summary information on each area. The categories are: (1) valuation models and REIT returns, (2) REIT return volatility, (3) REIT returns and asset growth, (4) the impact of financial leverage on REIT returns, and (5) REIT returns and investor sentiment. Results are aggregated into a framework highlighting findings that are useful in explaining the REIT return behavior.

PurposeThis study seeks to examine the market returns of five domestic real estate investment trust (REIT) indices to determine whether they exhibit a turn‐of‐the‐month (TOM) effect.Design/methodology/approachA test is carried out for the TOM effect by employing a battery of parametric and non‐parametric statistical tests that address the concerns of distributional assumption violations. An OLS regression model compares the TOM returns with the rest‐of‐the‐month (ROM) returns and an ANOVA model examines the TOM period while controlling for monthly seasonalities. A non‐parametric t‐test examines whether the TOM returns are greater than the ROM returns and a Wilcoxon signed rank test examines the matched‐pairs of TOM and ROM returns.FindingsA TOM effect in all five domestic REIT indices is found: real estate 50 REIT, all‐REIT, equity REIT, hybrid REIT, and mortgage REIT. More specifically, the six‐day TOM period, on average, accounts for over 100 per cent of the monthly return for the three non‐mortgage REITs, while the ROM period generates a negative return. Additionally, the TOM returns are greater than the ROM returns in 75 per cent of the months.Research limitations/implicationsThe data are limited to five‐years of daily returns and five different indices. Thus, the results could be biased on the selected time period.Practical implicationsThese results are important to REIT portfolio managers and investors. Domestic REIT markets experience a TOM effect from which investors and portfolio managers can benefit.Orginality/valueThe daily returns of all five major domestic REIT indices are examined. Data are evaluated which include daily returns after the passage of the REIT Modernization Act of 1999 that resulted in numerous changes for REITs. Whether the TOM effect can be detected with both parametric and non‐parametric tests is examined.

PurposeIn 2014, real estate investment trust (REIT) emerged as a new alternative investment option in India. This research aims to give an empirical authentication of the Indian REITs performance from April 2019 to July 2022 across a range of investment variables.Design/methodology/approachUsing monthly total returns in Indian Rupee, risk-adjusted Indian REIT performance and investment portfolio characteristics are examined. Indian REITs' potential in a diversified multi-asset portfolio is analysed using the mean-variance analysis, asset allocation diagram and efficient frontier.FindingsDuring April 2019–July 2022, Indian REITs provided a lower return than stocks but outperformed bonds despite coronavirus disease 2019 (COVID-19) lockdowns, which hurt the traditional working from office concept. The study also examined REIT allocation to an Indian mixed-asset portfolio and the benefits of a diversified portfolio.Practical implicationsIndian REITs provide a liquid, transparent alternative to direct property for investors seeking exposure to Indian real estate markets. Indian REITs gave real estate companies an extra funding source and investors an alternate asset. This paper explores Indian REITs' potential opportunities, given that domestic and foreign investors' demand for transparent property investment in India. The analysis found a positive early performance despite a challenging environment.Originality/valueThis paper offers the first empirical performance validation of Indian REITs as a way to obtain exposure to commercial property in India and the REITs' role in a diversified asset portfolio. The authors' study improves investors' decision-making abilities by providing empirically validated, valuable and practicable property investing insights.

Real Estate Investment Trusts (REITs) in Australia experienced tremendous growth and investor interest following the crash of unlisted property funds in the 1990s. Since 2001, management structures have shifted from external property management to an internally advised model. The sector's returns had been notably rewarding up till the Global Financial Crisis but rising costs of debt and years of aggressive borrowing to fund expansions have eroded the values of REITs. Externally managed trusts had relatively higher levels of debt than their internally managed counterparts thus increasing the sensitivities to interest rate risks. Yet internally managed REITs engage in a wider set of operating activities which compound exposures to market and financial risks. Using panel regressions, this paper aims to examine the joint impact of financial leverage and management structure on REIT returns in terms of their sensitivities towards stock market returns and changes to yields of 10-year bonds and 90-day bank accepted bills. We utilise a sample period of monthly data from January 1980 to March 2013. Panel quantile regressions are also employed to analyse how sensitivities to market risks, short and long-term interest rate risks vary at different parts of an economic cycle. Our study finds that REITs are positively related to the stock market and the effect is greater for REITs with greater financial leverage as well as stapled trusts. REITs are only negatively affected by short-term interest rates at the lowest 5 per cent quantile of returns. Long-term interest rates have an inverse effect on REITs only at the upper 75 and 95 per cent quantiles. We consider the possibilities that rental yields and inflationary expectations may offset the influences of financing costs. Internal management appears to compound market and interest rate risks. These have implications on investors looking to select REITs as substitutes of direct property investments.

More than 30 countries have introduced real estate investment trusts (REITs). One main objective is to attract foreign investors and improve the liquidity of the respective listed property sector. We investigate whether the introduction of REITs meets this objective by using the South African listed property sector as a laboratory. In particular, we employ panel data to investigate whether converting to REITs improved the liquidity of listed South African property firms through foreign investments. We find that foreign investor trading after the introduction of REITs has a significantly positive impact on activity measures such as turnover and trading volume. On the other hand, the significantly negative impact of foreign investor trading on friction measures such as bid-ask spread and Amihud's (2002) illiquidity measure, which was prevalent in the pre-REIT period, disappears once REITs were introduced. Thus, the introduction of REITs eliminated the impact of foreign investments on the depth and tightness of the listed property market in South Africa.

Real Estate Investment Trusts (REITs) provide investors with an indirect means of investing in income-producing real estate assets, such as office complexes, shopping plazas, hotels, and apartment buildings, by purchasing shares of publicly traded REITs. India’s first REIT, the Embassy Office Parks REIT, was listed in March 2019. This paper investigates the long-run and short-run relationships between Indian REITs and the broader equity market, as well as the listed realty stock market, examining whether these markets are integrated or segmented, and whether Indian REITs qualify as an alternative asset class within a multi-asset portfolio. The study finds a causal relationship but no cointegration, indicating the absence of a long-run relationship between Indian REITs and the equity market. This suggests the existence of segmentation between the stock market and REITs, implying that REITs can serve as a diversification tool within an investment portfolio. The paper concludes that REITs offer a diversification opportunity, with returns that, while lower than stocks due to dividend obligations, resemble those of bonds, highlighting their hybrid nature. This study contributes to the literature on alternative investments in emerging markets and provides insights for policymakers and market participants. The findings underscore the potential benefits of long-term diversification for investors who hold both real estate stocks and REITs simultaneously, making the identification of such relationships crucial for both investors and policymakers.

Real Estate Investment Trusts (REITs) provide investors with an indirect means of investing in income-producing real estate assets, such as office complexes, shopping plazas, hotels, and apartment buildings, by purchasing shares of publicly traded REITs. India’s first REIT, the Embassy Office Parks REIT, was listed in March 2019. This paper investigates the long-run and short-run relationships between Indian REITs and the broader equity market, as well as the listed realty stock market, examining whether these markets are integrated or segmented, and whether Indian REITs qualify as an alternative asset class within a multi-asset portfolio. The study finds a causal relationship but no cointegration, indicating the absence of a long-run relationship between Indian REITs and the equity market. This suggests the existence of segmentation between the stock market and REITs, implying that REITs can serve as a diversification tool within an investment portfolio. The paper concludes that REITs offer a diversification opportunity, with returns that, while lower than stocks due to dividend obligations, resemble those of bonds, highlighting their hybrid nature. This study contributes to the literature on alternative investments in emerging markets and provides insights for policymakers and market participants. The findings underscore the potential benefits of long-term diversification for investors who hold both real estate stocks and REITs simultaneously, making the identification of such relationships crucial for both investors and policymakers.

Against a plethora of justifications on the importance of work on the relationship between investment instruments in different markets context, there is still gap of knowledge on the relationship between a regional Real Estate Investment Trusts (REITs) market and a particular REIT of a country. This study is pursued with the objective of revealing the relationship between two markets, namely the Malaysian REIT and the Asian REITs market. This was investigated using monthly data from March 2005 until September 2009. Japan and Singapore are chosen to represent the Asian REITs because the two dominate the Asian REIT market in terms of market capitalization. The study employs Engle-Granger Cointegration test to examine the variables' long-run relationship, while vector autoregression (VAR) is deployed to explore the variables' dynamic interactions. The empirical findings of the study show an absence of long-run relationship between Malaysian REIT market and the Asian REITs market. With regard to their dynamic interactions, the two markets are found to be positively correlated and short-term relationship can be established between them. The Malaysian REIT is found to be lagging against the Asian REITs for up to two months.

Exchange rate exposure of REITs

PurposeThe Group Method of Data Handling (GMDH) neural network has demonstrated good performance in data mining, prediction, and optimization. Scholars have used it to forecast stock and real estate investment trust (REIT) returns in some countries and region, but not in the United States (US) REIT market. The primary goal of this study is to predict the US REIT market using GMDH and then compare its accuracy with that derived from the traditional prediction method.Design/methodology/approachTo forecast the return on the US REIT index, this study used the GMDH neural network and the generalized autoregressive conditional heteroscedasticity (GARCH) model. In this test, the training samples, testing samples, and kernel functions of the GMDH model are controlled to investigate their impact on the accuracy of the machine learning approach. Corresponding experiments were performed using the GARCH model, and the accuracies of these two approaches were compared.FindingsCompared with GARCH, GMDH’s accuracy is much higher, indicating that the machine learning approach can provide a highly accurate prediction of REIT prices. The size of the training samples and the kernel functions in the GMDH model affect the accuracy of the prediction results. In particular, the kernel function has a significant impact on prediction accuracy. The linear and linear covariance kernel functions are simple to train and yield accurate predictions, whereas the quadratic function is difficult to train. Even with small training samples, GMDH can outperform GARCH in prediction accuracy.Research limitations/implicationsAlthough GMDH shows good performance in predicting the US REIT return, it is still a black-box model, and the algorithm is difficult for financial analysts to develop and customize. The data used in this study come from the US REIT market, which is the world’s largest and most liquid market.Social implicationsThis research shows that the GMDH model outperforms the GARCH model in forecasting REIT returns. Hence, investors can use the machine learning approach to make more accurate predictions of the target REITs’ returns and thus better investment decisions. Future investors and researchers may use GMDH to forecast the performance of REITs in other markets.Originality/valueThis is the first study to apply the GMDH neural network to the US REIT market and determine the impact of the two factors on its performance. For example, this research first discusses the impact of kernel functions on the US REIT market using the GMDH neural network. It also includes short-term daily prediction returns that were not previously considered, making it a valuable reference for financial industry analysts.