Australian Real Estate Investment Trusts Research Articles

Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs

This study investigated the relationship between a sector-specific Australian Real Estate Investment Trust (A-REITs) and the underlying property assets in its property portfolio. The existing studies have assessed the connectedness/correlation between the A-REITs market and a variety of other asset markets, including the overall stock, bond, and direct real estate markets. This study applied regression analysis methods and discovered that there exists a certain degree of linear correlation between the underlying property assets and the return of the subject A-REITs. The most significant variable is the occupancy of the offices. The higher the occupancy is, the better the dividend can be. Features of the A-REITs also affect the dividend outcomes, specifically, the total portfolio market value and the capitalization rate. This suggests that the annual valuation outcomes show a positive relation with the performance of the A-REITs.

The short-run dynamics of Australian real estate investment trusts and direct real estate at the subsector level

PurposeThis paper examines the extent of the short-run relationship between Australian real estate investment trusts (A-REITs) and direct real estate returns on both a commercial property sector and a prime and secondary grade basis, i.e. a subsector basis.Design/methodology/approachTwo-step methodology is used. First, we identify the dynamic interdependencies between A-REITs and each commercial property subsector to determine whether the returns of A-REITs lead each subsector or vice versa. Second, short-run deviations between these asset returns are estimated by measuring their individual response behaviours to changes in key economic and financial market factors that are expected to influence these returns.FindingsResults suggest that each subsector shares a unique relationship to A-REITs, given each prime and secondary grade commercial property return series varies in behaviour. Some property subsector returns can be predicted by movements in A-REIT returns, whereas returns for others move independent to changes in A-REITs. Similarly, some subsectors commove with A-REITs in response to changes in certain market factors, whereas others diverge. As such, these findings have practical significance to fund managers and portfolio selection, as each commercial subsector embodies its own exposure to A-REITs and vulnerabilities to market forces. Subsectors that commove with A-REITs in response to certain market forces may be used as substitutes in a portfolio. Alternatively, subsectors that diverge from A-REITs in response to market forces may offer diversification benefits when combined.Practical implicationsThese findings extend beyond existing research to offer critical decision-making guidance at the acquisition level, as fund managers may more closely consider the impact that prime or secondary grade properties within a given commercial sector may have on a portfolio that consists of public and private Australian real estate. Ultimately, a more informed acquisition may be carried out as consideration of a property's asset grade allows for a deeper insight into the property's risk profile and its anticipated short-run impact on a portfolio.Originality/valueThis paper extends previous studies that focus mostly on aggregate or sector-level returns by measuring REIT and real estate dynamics at the subsector level, allowing for practical significance at not only the portfolio level but crucially at the acquisition level, a pivotal decision-making stage for fund managers. This is also the first paper to study REIT and real estate causality and response patterns to changes in market factors at the Australian sector level.

The Effect of Economic and Fundamental Factors on the Australian Property Performance

This study examines the effect of the trade weighted index (TWI) return on the volatility of Australian Real Estate Investment Trusts (REITs). This study also contributes to the existing literature by measuring the impact of the macroeconomics and fundamental factors on the real estate market for three major states in Australia including New South Wales, Victoria, and Queensland. Using monthly house and unit prices and covering the period from 2009 to 2016, this research uses both fixed and random effect panel data models and the vector autoregressive (VAR) model. The findings of the study suggest that the movement of the TWI has positive and statistically significant impact on Australian REITs suggesting the real estate investors expect risk premium on exchange rate factor. The results also purport that both house and unit prices in Australia are exposed to the fluctuations of the fundamental risk factors. Rental yield, a return component, has a positive relationship with the real estate market in New South Wales and Queensland. The findings of the study provide significant insight to the investors in their portfolio formation since they have the understanding of the priced risk factors.

How accurate are A-REIT IPO dividend forecasts?

Purpose The purpose of this paper is to investigate the accuracy of Australian Real Estate Investment Trust (A-REIT) initial public offering (IPO) dividend forecasts between 1994 and 2016. Design/methodology/approach This study compares the dividend forecasts of A-REIT IPOs for the first dividend forecast period in the prospectus, with the actual dividend declared for that forecast period. As well as simple descriptive summary measures, this study also employs an exact logistic regression approach to examine the factors that might influence the IPOs achieving or exceeding the dividend forecast. Findings The study identifies that the dividends declared, on average, were greater than the dividend forecast and that more than nine out of ten of the IPOs listed after 1999 achieved or exceeded their prospectus forecast. In addition the authors observe positive mean forecast errors, suggesting dividend forecasts in A-REIT IPOs, are cautiously biased. This is in contrast to the industrial company data reported in Brown et al. (2000) which suggest dividend forecasts are optimistically biased. The study also finds the A-REIT IPOs that did not forecast a dividend, generally did not pay a dividend. Practical implications The results will inform dividend seeking institutional and retail investors of the investment opportunities in A-REIT IPOs. Originality/value This paper adds to the discussion of the relative predictability of dividends of A-REIT IPOs compared to industrial company IPOs.

Does it pay to be responsible? Evidence on corporate social responsibility and the investment performance of Australian REITs

ABSTRACT This paper creates portfolios to better understand the influence of corporate social responsibility (CSR) practices on the risk-adjusted returns of Australian Real Estate Investment Trusts (A-REITs) from 2007 to 2016. We find that A-REIT portfolios (except for the high CSR-rated portfolio) outperform the broader Asia-Pacific market. We also show that the low CSR-rated A-REIT portfolio delivers the best risk-adjusted return performance. Our findings indicate that while CSR practices might mitigate risk in A-REITs, they do not appear to improve risk-adjusted return performance. However, CSR practices may be effective in producing greater risk-adjusted returns for A-REITs during market downturns or economic crises.

Explaining the premium to NAV in publicly traded Australian REITs, 2008–2018

PurposeThe purpose of this paper is to explore the levels and determinants of net asset value (NAV) premiums/discounts for publicly traded Australian Real Estate Investment Trust (A-REIT) market during the last decade. A-REITs were severely affected by the global financial crisis as S&P/ASX 200 A-REIT index-listed property stocks experienced 47 per cent discount to NAV, on average, in 2008–2009 crisis. Since 2013, A-REIT sector has exhibited a strong recovery from the financial crisis and traded at high premiums to date. Understanding the relationship between pricing in the public and private real estate markets has taken on great importance as A-REITs continue to trade at significant premium to NAV unlike their counterparts in the USA and Europe.Design/methodology/approachThis paper follows a rational approach to explain variations in NAV premiums and explores the company-specific factors such as liquidity, financial leverage, size, stock price volatility and portfolio diversification behind the A-REIT NAV premiums/discounts. The study specifies and estimates a model of cross-sectional and time variation in premiums/discounts to NAV using semi-annual data for a sample of 40 A-REITs over the 2008–2018 period.FindingsThe results reveal that A-REIT premiums to NAV can be explained not only by the liquidity benefit of listed property stocks but also positive financial leverage effect. During the past decade, A-REITs have followed an aggressive approach in financing their growth by using borrowed funds to purchase assets as the income from the property offsets the cost of borrowing and the risk that accompanies it. Debt-to-equity ratio has to be considered as an important source of NAV premiums as highly geared A-REITs that favoured debt financing over equity financing traded at significant premiums to NAV of their underlying real estate assets.Practical implicationsThe paper includes implications for the REIT market investors. The regression analysis shows that specialty A-REITs with a focus on creative market niches traded at higher premiums compared with other property stocks, especially in the post-GFC recovery period. Specialty REITs are more highly valued by the market than their traditional specialised counterparts (e.g. office and retail REITs), and those pursuing a diversified strategy.Originality/valueThis paper presents an Australian case study as the A-REIT market provides a suitable environment for testing the effect of financial gearing on the REIT premium to NAV. The study provides empirical evidence supporting the importance of debt-to-equity ratio in explaining the variation in A-REIT NAV premiums.

The impact of the stapled security structure on the quality of financial disclosure: Evidence from Australian Real Estate Investment Trusts and Listed Infrastructure Funds

This paper is the first study to explore whether the stapled structure influences firms’ activities in earnings management (EM). Trusts and firms under stapled securities are exposed to various managerial opportunities and activities that can provide the flexibility of using EM approaches. Therefore, the stapled structure is expected to induce increased EM behavior and signal a lower level of financial disclosure quality than the unstapled structure. This empirical research analyzes a panel dataset that contains information of Australian REITs (A-REITs) and Listed Infrastructure Funds (LIFs) from the year of 2000–2017. Evidence shows that stapled A-REITs and LIFs use a greater magnitude of EM approaches than unstapled entities. The results imply that the stapled security structure may signal lower-quality of financial disclosure for firms than the unstapled security structure. This study provides additional insight into the understanding of how the security structure may impact firms’ financial disclosure behavior.

Corporate social responsibility and the performance of Australian REITs: a rolling regression approach

This paper examines the influence of corporate social responsibility (CSR) on the performance of Australian Real Estate Investment Trusts (A-REITs). Rolling regressions are estimated to establish the risk-adjusted performance of low-, average- and high-rated CSR A-REIT portfolios over time. We find that the low CSR A-REIT portfolio outperforms its counterparts. However, while the average and high CSR A-REIT portfolios deliver increased risk-adjusted performance over the sample period, the opposite is observed for the low CSR A-REIT portfolio. Due to the uptake of CSR activities and changing risk factor loadings, our results suggest that the gap in performance between lower- and higher-rated CSR A-REITs appears to be closing.

International Real Estate Review

This study explores the sensitivity of the performance of Australian real estate investment trusts (A-REITs) to changes in short and long term interest rates. Based on the intertemporal capital asset pricing model in Merton (1973), we propose an asset pricing model that consists of market returns, macroeconomic indicators, and short and long term interest rates. The effect of market capitalisation is also explored. High debt funds show greater sensitivity to adverse movements in long term interest rates compared to low debt funds. This suggests that gearing levels play a significant role in the returns generating process. All size based portfolios exhibit strong exposure to market risk with medium size A-REITs displaying greater sensitivity to movements in both short and long term interest rates. Although market risk became a stronger driver of returns during the Global Financial Crisis (GFC), the impact was less prominent post-GFC possibly due to already low levels of interest which created an environment of cheap credit. The implications for asset allocation strategies are that portfolio managers and other investors can reduce exposure to interest rate risk by selecting funds with less leverage and are large in size. High debt funds benefit more during periods of low interest but this may be offset when there is a corresponding increase in long term interest rates.

Australian interest rate movements and A-REITs performance: an analysis by industry sector

Investment managers have traditionally resorted to the Australian real estate investment trusts (A-REITs) as a means to growing portfolio return. The A-REITs have been popular for yielding some of the best returns until 2007, when the global financial market (GFC) collapse led to major fall in values. Since the GFC, with low interest rates the A-REITs have performed well compared to the broader stock and bond markets. Given low expectations of additional monetary easing, future rising interest rate environment can significantly impact A-REIT performance mainly in industry sectors with greater reliance on debt funding. Thus, this research explores the sensitivity of A-REITs performance to changes in short- and long-term interest rates across five sectors: diversified, industrial, retail, office and specialised (non-core) funds. The analysis covers a 21-year period (1995–2016) using the capital asset pricing model. In doing so, the research allows comparison of A-REITs performance at sub-sector level and over different market cycles. Findings indicate that both the diversified and retail sector exhibit strong relationship to market risk, short- and long-term interest rates. Rising short-term interest rates contribute to positive returns while rising long-term interest rates result in lower returns. However, the impacts of movements in interest rates on industrial, specialised (non-core) and office sectors were not well explained by the asset pricing model. This could be due to the relatively small sample size of these funds. Overall, the results suggests that gearing levels and by extension costs of debt, do play a significant role in the returns generating process. The paper offers a well-defined practical implication by suggesting that investors may hedge against interest rate risk by selecting A-REITs sub-sector funds with less leverage and large market capitalisation.

The adjustment speeds of short-run real estate investment trust (REIT) and corresponding stock returns in the USA and Australia

This study first uses the non-linear co-integration with structural breaks by Gregory and Hansen (1996) to examine whether non-linear co-integration exists between real estate investment trusts (REITs) and corresponding stock markets in the United States and Australia. Second, we employ the smooth transition vector-error correction model (STVECM) including the generalized autoregressive conditional heteroskedasticity (GARCH) model to separately explore the adjustment efficiencies of non-linear short-run REIT and corresponding stock return dynamics, as well as respective REIT return dynamics when the long-run disequilibrium occurs. The results show that a structural break co-integration exists between the equity and mortgage REITs and stock markets in the US, between the REITs and stock markets in the Australia and between the REIT markets in both the US and Australia. When there are large positive and negative deviations of STVECM, the adjustment speed of reverting to equilibrium of the S&P 500 index is greater than that of the Mortgage REIT index. However, when there are large positive (negative) deviations of STVECM, the adjustment speed of reverting to equilibrium of the Australian REIT (stock) index is greater, and that of the Australian REIT (US REIT) index is greater. In addition, by using a non-linear Granger causality test by Hiemstra and Jones (1994), we find that credit price effects exist between the US for each type of REIT and stock markets regardless of large positive or negative deviations (or returns) in STVECM (or STVAR). However, there is a feedback effect exists between the REITs and the stock markets in Australia.

Demystifying the Management Structure Puzzle: an Empirical Investigation into the Drivers of REIT Internalization

Real estate investment trusts (REITs) have grown to become an important financial product in Asia, which today stands as the second largest REIT market in the world. Although existing literature has shown that externally managed REITs have underperformed their internally managed counterparts, the Asian REITs market has a strong preference for the external management model. This paper investigates the factors that drive REITs to internalize or deter them from internalizing their manager by studying the characteristics of 26 internalization subjects in Australia at their point of internalization. We compare their financial, corporate governance and portfolio characteristics to a control group. We find the MBR, the parent of the REIT manager, the asset size, and the geographic diversity of assets to be significant determinants of the probability of these REITs internalizing their manager. The low growth prospect faced by large Australian REITs that had a domestic investment focus motivates them to internalize their manager.

Corporate Social Responsibility and the Performance of Australian REITs: A Rolling Regression Approach

This paper examines the influence of corporate social responsibility (CSR) on the performance of Australian Real Estate Investment Trusts (A-REITs). Rolling regressions are estimated to establish the risk-adjusted performance of low, average, and high-rated CSR A-REIT portfolios over time. We find that the low CSR A-REIT portfolio mostly outperforms its counterparts. However, while the average and high CSR A-REIT portfolios deliver increased risk-adjusted performance over the sample period, the opposite is observed for the low CSR A-REIT portfolio. Due to the uptake of CSR activities and changing risk factor loadings, our results suggest that the gap in performance between lower and higher-rated CSR A-REITs appears to be closing.

PRICE DISCOVERY AND VOLATILITY TRANSMISSION IN AUSTRALIAN REIT CASH AND FUTURES MARKETS

This study examines the price discovery function and volatility spillovers in australian real estate investment trust (A-REIT) index futures and also investigates the effects of the global fi- nancial crisis (gfc) on these two features. as opposed to the general understanding of the relationship between the cash and the futures markets, the current study finds that the A-REIT cash market led the a-reIt futures market in price discovery and volatility transmission processes before the gfc. However, during the GFC, the two markets interacted bilaterally in terms of information flow, i.e., in- formation flowed in both directions. Furthermore, after the GFC, the futures market followed the cash market again, but less closely. These findings have broad implications for investors in property assets.

Long‐Term post‐merger announcement performance. A case study of Australian listed real estate

AbstractThis study examines the long‐term postmerger performance of Australian Real Estate Investment Trusts (A‐REITs). The A‐REIT sector is used as a case study being less vulnerable to agency issues due to its regulatory structure (Eichholtz and Kok, 2008; Ratcliffe et al., 2009). Research on conventional firms has shown, on average, shareholders are worse off in the long run (Alexandridis et al., 2012). In contrast, we find that shareholders experience significantly positive abnormal returns, after accounting for the financial crisis. This outcome suggests that when managers are restricted with the use of retained earnings and the type of investment, they may be less susceptible to hubris and/or agency issues.

Predicting the behaviour of Australian ESG REITs using Markov chain analysis

Purpose– The purpose of this paper is to present the use of Markov chain to predict the behaviour of Australian real estate investment trusts (REITs) that are more highly valued in the areas of environmental, social and governance (ESG).Design/methodology/approach– For the empirical analysis, states is defined as the price interval between 10-day moving averages and daily closing prices. A total of 18 Australian ESG REITs were analysed.Findings– The results show that there is inconsistency in the probabilities obtained for REIT prices across all four states: 1 (= −$0.05), 2 ( < −$0.05 to < $0.05], 3 ($0.05 < to = $0.1] and 4 ( > $0.1). The findings suggest that price movements are occurring in a random fashion and that ESG REITs do not necessarily have more superior performance.Research limitations/implications– The scope of analysis is only from 2008 to 2014. This is attributed to the availability of the Experts in Responsible Investment Services dataset, which is used to determine the “greenness” of Australian REITs.Originality/value– This research is original, not just in terms of the scope of analysis but also the methodology presented has not been applied to analyse REITs data.

The long-term linkages between direct and indirect property in Australia

Purpose– Investment in Australia’s property market, whether directly or indirectly through Australian real estate investment trusts (A-REITs), grew remarkably since the 1990s. The degree of segregation between the property market and other financial assets, such as shares and bonds, can influence the diversification benefits within multi-asset portfolios. This raises the question of whether direct and indirect property investments are substitutable. Establishing how information transmits between asset classes and impacts the predictability of returns is of interest to investors. The paper aims to discuss these issues.Design/methodology/approach– The authors study the linkages between direct and indirect Australian property sectors from 1985 to 2013, with shares and bonds. This paper employs an Autoregressive Fractionally Integrated Moving Average (ARFIMA) process to de-smooth a valuation-based direct property index. The authors establish directional lead-lag relationships between markets using bi-variate Granger causality tests. Johansen cointegration tests are carried out to examine how direct and indirect property markets adjust to an equilibrium long-term relationship and short-term deviations from such a relationship with other asset classes.Findings– The authors find the use of appraisal-based property data creates a smoothing bias which masks the extent of how information is transmitted between the indirect property sector, stock and bond markets, and influences returns. The authors demonstrate that an ARFIMA process accounting for a smoothing bias up to lags of four quarters can overcome the overstatement of the smoothing bias from traditional AR models, after individually appraised constituent properties are aggregated into an overall index. The results show that direct property adjusts to information transmitted from market-traded A-REITs and stocks.Practical implications– The study shows direct property investments and A-REITs are substitutible in a multi-asset portfolio in the long and short term.Originality/value– The authors apply an ARFIMA(p,d,q) model to de-smooth Australian property returns, as proposed by Bond and Hwang (2007). The authors expect the findings will contribute to the discussion on whether direct property and REITs are substitutes in a multi-asset portfolio.

CONTAGION AND DOWNSIDE RISK IN THE REIT MARKET DURING THE SUBPRIME MORTGAGE CRISIS

This study empirically tests the contagion effects in stock and real estate investment trust (REIT) markets during the subprime mortgage crisis by using daily stock- and REIT-markets data from the following countries and international bodies: the United States, the European Union, Japan, Hong Kong, Singapore, Australia, and the global REIT market. We found a significant and positive dynamic conditional correlation (DCC) coefficient between stock returns and REIT returns. The results revealed that the REIT markets responded early to market shocks and that the variances were higher in the post-crisis period than in the pre-crisis period. Evidence supporting the contagion effects includes increases in the means of the DCC coefficients during the post-crisis period. The Japanese and Australian REIT markets possess the lowest time-varying downside systematic risks. We also demonstrated that the “DCC E-beta” captures more significant downside linkages between market portfolios and expected REIT returns than does the standard CAPM beta.

The directs costs of A-REIT IPOs

Purpose – Direct costs of Australian Real Estate Investment Trust (A-REIT) initial public offerings (IPOs) were last reported in the literature using data to 2004. Much has occurred since then. The purpose of this paper is to introduce and include the A-REIT IPOs over the last ten years and examine the cost and the factors influencing the percentage underwriting and percentage total direct costs by A-REITs IPOs. The study also investigates specifically whether the utilization of an underwriter (who guarantees the success of the capital raising) rather than a stockbroker (who does not guarantee such success) costs significantly more. Design/methodology/approach – The study examines 87 A-REIT IPOs from January 1994 until December 2013. An OLS regression is performed to identify significant influencing factors on percentage underwriting costs and percentage total direct capital raising costs. Findings – The study finds that larger capital raisings and those with large investor or institutional involvement identified in the prospectus are significant in reducing underwriting costs. The study does not find that underwritten IPOs are significantly more expensive (or cheaper) than those not underwritten. Additionally, the size of the issue, whether the firm offers stapled securities (is internally managed) and has higher net asset to issue price characteristics reduces the total cost of underwritten IPOs. Practical implications – The paper provides information to new A-REIT issuers, underwriters and advisors broadly on new issue costs and on factors influencing the IPO issue costs. Originality/value – The study is the first to examine the costs of A-REIT IPO capital raising data in the years prior to and following the recent global financial crisis period.

Modeling the Dependence Structure between Australian Equity and Real Estate Markets – A Copula Approach

In the last decade, the Australian market for Real Estate Investment Trusts (REITS) has shown substantial growth rates. Australian Real Estate Investment Trusts (AREITS) are a unitized portfolio of property assets which allows investors to purchase a share in a diversified and professionally managed portfolio of real estate. We apply conditional copula models in order to investigate the dependence structure between returns of AREITS and Australian equity markets. The dynamic analysis is based on an AR-GARCH approach to model time-varying volatility of the individual series in combination with different copulas to capture the dependence structure between the standardized residuals. The Gaussian, Student t, Clayton and Gumbel copula are fitted and so-called ‘blanket’ goodness-of-fit tests are conducted in order to examine the appropriateness of the different copula functions. We also compare the suggested copula models to a standard variance-covariance approach and the Dynamic Conditional Correlation (DCC) model. We find significant positive correlation between the series what somehow contradicts earlier studies on the topic finding negative or only weak positive correlations between REITS and equity investments. Therefore, for Australian markets the diversification potential of investments in REITS might be less significant than for overseas markets. We also find significant tail dependence, in particular in the tail dependence structure that is best modelled by the Student t copula. Conducting a back-testing Value-at-Risk study for a portfolio combining investments in real estate and equity we find that the conditional copula as well as the DCC model significantly outperforms a static variance covariance approach. Our findings suggest that ignoring the complex and dynamic dependence structure in favour of a simple multivariate normal model leads to a significant underestimation of the actual risk.