LEVERAGE AND NET ASSET VALUE (NAV) DISCOUNTS DURING THE CREDIT CRISIS: EVIDENCE FROM ASIAN REITS AND REAL ESTATE OPERATING COMPANIES

Abstract

The primary interest of this study is to investigate the impact of leverage on Price over Net Asset Value (P/NAV) of Real Estate Investment Trust (REITs) and Real Estate Operating Companies (REOCs) in Asian developed markets (i.e. Japan, Singapore, and Hong Kong). This is achieved by a comprehensive study of 101 REITs and REOCs over the period of 2006 and 2010, using fixed effect panel data regressions. The regression results show that REITs and REOCs differ in terms of their debt equity structure. Since the financial crisis, REITs have employed more debt than their counterparts, which is indicated by the positive coefficients of the interaction variables of time and company type dummies. With regards to NAV discount, leverage is found to have a positive relation with price over NAV in the boom period. However, since the recent global financial crisis, debt ratio exerts a negative impact on P/NAV. The findings suggest that in the presence of a credit crunch, investors have seen highly-leveraged firms as riskier. Thus, a higher discount to NAV is required to compensate them for taking more risks. More interestingly, the negative impact of financial leverage is less severe for REITs than REOCs during and after the crisis. This implies that investors favour REITs over REOCs given their same level of gearing ratio.