HIDDEN RISKS ASSOCIATED WITH FINANCIALLY ENGINEERED REITS: FINDINGS FROM SREITS
CRISPIN WILLIAM FRANCIS
CRISPIN WILLIAM FRANCIS
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Abstract
In recent years, Real Estate Investment Trusts (REITs) and real estate Business Trusts in Singapore (collectively termed as SREITs) have increasingly used financial engineering such as income support and asset revaluations to boost financial performance. This study assesses the risks associated with financially engineered SREITs. Our empirical strategy applies multivariate regression techniques to examine the returns on such SREITs, controlling for the factors that may affect performance.
Using data from 2002 to 2014, we find that financial engineering did not significantly affect nominal returns. On a risk-adjusted basis however, financially engineered SREITs significantly underperformed their non-financially engineered counterparts. Furthermore, SREITs with any form of financial engineering tended to perform worse than non-financially engineered SREITs on the 1st day IPO (Initial Public Offer), strongly suggesting that large shareholders, pre-IPO, were selling off their shares upon IPO.
We derived the implied rental growth needed by the currently financially engineered SREITs to reach the supported levels of rental income. We find that the implied rental growth might be difficult to obtain in the current market conditions and hence, shareholders’ wealth is at risk.
This paper highlights the dangers of financial engineering to shareholders of the SREITs, many whom are retail investors that may be unaware of the hidden risks associated with financial engineering. A key implication is the importance of stronger governance and instituting more checks and balances to safeguard both the interests of unsophisticated investors and the reputation of the Singapore SREIT market.
Keywords
Real Estate, RE, Lum Sau Kim, 2014/2015 RE, Business Trusts, Financial engineering, Income support, Real Estate Investment Trusts, REITs, Rent guarantee
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Date
2015-06-02
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Dissertation