INCOME SUPPORT IN S-REIT

Abstract

Hitherto, little research has been done on the topic of income support in REITs. This paper examines its impact on S-REITs’ IPO and acquisition wealth effect. Income support in IPO was tested against three dependent variables, namely IPO Return, First-day Return over NAV and IPO Price to NAV. The findings suggest positive correlation between income support and the three variables, i.e. both investors and sponsors placed a premium for income support, but the results lack statistical significance. Interestingly, yield spread was found to have an interactive effect with income support with respect to IPO Price to NAV, but not significant. Four-day cumulative abnormal returns was employed as the dependent variable to measure the impact of income support in acquisition announcements. The result was significant with positive coefficient, suggesting that investors favour the guaranteed yield in income support acquisitions over its long-term risk. In addition to the two studies, a review was conducted to investigate the incremental equity that S-REITs raised by incorporating income support arrangements during IPO, and a retrospective study on the performance of income support properties upon expiration of the arrangement. The findings showed that income support, on average, helped REITs raise 3 times more capital than the actual amount disbursed. Also, income support properties underperformed the market index in both rental income and capital value appreciation. Overall, poorer performance in the long run of income support properties presents long-term risk to investors. The stock market reaction is, however, favourable, which led to the conclusion that investors are short-term oriented as they are attracted to the higher guaranteed yield.