ECONOMIES OF SCALE OF ASIAN REITS

Abstract

Asian REITs have experienced phenomenal growth over the past decade. During a period of 10 years, the number of REITs has increased from 2 in 2001 to about 120 in 2010 and total market capitalization has increased to approximately US$102 billion. What are the driving forces behind the active mergers and acquisitions of Asian REITs? This study is aimed at ascertaining the existence of economies of scale to find the answer for this question.

70 REITs from Japan, Singapore, Hong Kong and Malaysia were analyzed via Multivariate Regression model over the period of 2001 – 2010. The primary interest of this research is to examine the scale economies of REITs in (1) growth prospect, (2) revenue and expenses, (3) profitability, and (4) cost of capital and return on capital.

The regression results unveiled that Asian REITs enjoy economies of scale in certain aspects. The bigger the REIT becomes, it will be able to reap higher revenue and reduce fixed costs. As argued by some studies, bigger REITs have better access to capital and enjoy lower capital costs; this study agrees with this view. In addition, Asian REITs also have increasing returns to scale. Thus, expansion and growth would be beneficial to individual REITs.