A PERFORMANCE AND RISK ANALYSIS OF SHARIAH-COMPLIANT REITS

Abstract

The main motivation of this study aims to examine 1) the returns and risk behaviour of Shariah-compliant REITs relative to conventional REITs and 2) the effects of a REIT’s performance and risk characteristics after adopting Shariah compliance. The first part is achieved by assessing the returns and risk-adjusted performance of the Shariah-compliant REITs from August 2006 – January 2012. In the second part, the event-study methodology is applied to observe for abnormal returns around the reclassification announcement date. The pre- and post-reclassification performance and risk behaviour of Axis-REIT is also analysed to determine if the effects are attributed to the conversion. Islamic M-REITs outperformed conventional M-REITs over the entire sampled period, with underperformance seen only during the pre-GFC phase. However, paired sample t-tests indicated that these differences were statistically insignificant. The robustness of Islamic M-REITs relative to conventional M-REITs is accentuated during the GFC phase. On a risk basis, Islamic M-REITs were riskier compared to its conventional counterparts, although in Singapore’s context, Sabana Shari’ah Compliant REIT was less risky compared to conventional industrial S-REITs and the overall REIT index. An uptrend trend of the aggregated abnormal returns is seen after Axis-REIT’s reclassification announcement, signifying market anticipation of greater shareholder wealth as a result of this conversion. Although conversion to a Shariah-compliant REIT yields better performance, it is statistically insignificant. Furthermore, a comparison of the pre- and post-conversion beta coefficient suggests that reclassification to a Shariah-compliant REIT decreases a REIT’s systematic risk. These preliminary findings may incentivize conventional REITs to explore conversion to a Shariah-compliant REIT.