IMPACT OF ASIAN REIT REGULATIONS A STUDY ON THE IMPACT OF REIT REGULATIONS ON REITS’ PERFORMANCE IN SINGAPORE, AUSTRALIA AND HONG KONG

Abstract

Real Estate Investment Trusts (“REITs”) is a popular investment vehicle for real estate ownership, to the extent that the market capitalization of all the REITs amounted up to US$1.7 trillion in 2016, an increase from US$734 billion in 2010 – more than doubled over the time period of five years. However, only certain markets have shown to be conducive for the development of REITs. Countries, like Australia and Singapore, were able to attract both companies to set up REITs and investors to their market. One of the key reasons for their success is the strong regulations behind the industry. In fact, certain emerging countries are looking to introduce reforms to their current REIT regulations as an attempt to attract more investors into the country; for example, in the Philippines, the Securities and Exchange Commission started the study for the REIT revival in July 2016, as the Duterte administration plans to revive the stalled measure. Even the successful markets have been adjusting their REIT regulations to be even more attractive to compete amongst the different exchanges to list the REITs on. As such, it would be meaningful to study the impact of these regulation changes and how it impacts the performance and decision making of the REITs currently on the market. This report would also hope to provide additional data and information for the regulatory bodies that are seeking to jumpstart the industry in their countries. This research looks at the 4 key REIT markets in Asia Pacific, namely, Singapore, Australia, Hong Kong and Malaysia, from the time period of 2006 to 2016. Our sample consists of 72 REITs (34 REITs in Singapore, 24 REITs in Australia, 8 REITs in Hong Kong, 6 REITs in Malaysia) with a total of 1,061 observations. As many of the recent regulation changes have been to loosen the restrictions on the REITs and upcoming regulations should also be of the same nature, we would be studying specifically on the impact of these loosening regulations on the REITs’ performance. To measure the impact on the REITs, we identify and study 5 dependent variable, Return on Equity (ROE), Net Asset Value (NAV), Dividend Yield, Leverage and Number of Shares Outstanding. We look at the overall impact on the REIT data set, as well as differentiating across countries. Looking at the overall impact of the regulation changes, we find a statistically significance negative relation on the return on equity and the number of shares, i.e. after the introduction of the loosening regulations, return on equity (a measure of profitability) decreases and the number of shares outstanding does not increase as large a magnitude prior to the regulation changes. We find that in Singapore, with the new higher leverage limits and relaxation in property development limits, ROE is expected to decrease and that leverage is expected to increase. The decrease in ROE might be attributed to the higher cost of debt and development cost, given that REITs have more incentive to develop their properties. In Australia, after the changes in the regulations, there is a statistically significant increase in the ROE and there is a negative relationship with the dividend yield dependent variable. However, for Hong Kong, we do not see any statistical significant relationship of the regulation changes on the dependent variable that we studied.