Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/220161
Title: INTRODUCING REITS (REAL ESTATE INVESTMENT TRUSTS) TO ENHANCE THE RISK ADJUSTED RETURNS OF THE RISKY DIRECT REAL ESTATE PORTFOLIO
Authors: WONG CHIA CHERN JUSTIN
Keywords: Real Estate
Ho Kim Hin David
2011/2012 RE
Issue Date: 21-May-2012
Citation: WONG CHIA CHERN JUSTIN (2012-05-21). INTRODUCING REITS (REAL ESTATE INVESTMENT TRUSTS) TO ENHANCE THE RISK ADJUSTED RETURNS OF THE RISKY DIRECT REAL ESTATE PORTFOLIO. ScholarBank@NUS Repository.
Abstract: This study seeks to enhance the efficient frontier of risk-adjusted returns for a risky direct real estate portfolio via introducing REITS (real estate investment trusts). The portfolio comprises Pan-Asian office and industrial real estate markets of thirteen major Asian Cities, to which Asian REITS are introduced. The direct real estate total return data is in its ‘smooth’ natural form while the REIT data is in its ‘desmooth’ natural form. The efficient frontier for this Pan-Asian real estate portfolio is first constructed under the strategic asset allocation (SAA) model, incorporating the Analytic Hierarchy Process (AHP) approach, and the Markowitz quadratic-programming tactical asset allocation (TAA) model for obtaining a geographically diversified portfolio, an investor’s key objective. The efficient frontier is re-constructed for the real estate portfolio but with the direct real estate total return data desmoothed, which in turn ensures that the temporal lag error problem is minimized for the direct real estate and REIT return data. The 1st and 4th order autoregressive model for desmoothing is adopted. The efficient frontier with the desmoothed data clearly shows a higher overall TR for every corresponding standard deviation as compared to the smoothed data. The TAA for the desmoothed returns would lie on the efficient frontier at the maximum Sharpe ratio of 1.44 with a TR on 15.30% and a standard deviation of 7.31. Conversely, the TAA for the smoothed returns would like on the efficient frontier at the maximum Sharpe ratio of 1.31 with a lower TR of 14.2% and a standard deviation of 7.18%. Hence, with the desmoothing treatment of the direct real estate TR data, the enhancement of the efficient frontier for the risky direct real estate portfolio to which REITs can be introduced, would not be disguised and be readily noticeable. The AHP-SAA model is found to be rigorous in forming and estimating the strategic asset allocation model portfolio, which geographically diversifies the pan-Asian real estate international portfolio. It objectively and precisely reflects investor-expert judgment through pair-wise comparisons, subject to consistency ratio (CR) checks that are non-conflicting for assessing the macroeconomic and real estate specific factors. The Markowitz QP TAA model enables a diversified portfolio along time through making yearly tilts around the AHP-SAA model portfolio weights. The study finds the Pan-Asia real estate growth investment strategy to be appropriate for the thirteen pan-Asian cities with a very high, expected TR of 15.3% and an expected standard deviation of 7.31%, on an optimal risk-adjusted portfolio return basis. It has a minimum investment term of 7 years.
URI: https://scholarbank.nus.edu.sg/handle/10635/220161
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