SENSITIVITY TO MACROECONOMIC FACTORS AND DEFENSIVENESS OF SINGAPORE REITS BEFORE, DURING AND AFTER THE SUBPRIME CRISIS

Abstract

This dissertation investigates the sensitivity of Singapore real estate investment trusts (S-REITs) to important macroeconomic factors before, during and after the subprime crisis. Regression analysis based on monthly return of 9 S-REITs during the January 2003 – December 2010 period suggests that S-REITs do not possess the ability to hedge against the unfavourable effects triggered by the subprime crisis, namely the decline of Gross Domestic Product growth rate, the decline of Straits Times Index growth rate and the increase in inflation rate. Furthermore, this dissertation also tracks the movement of S-REITs defensiveness throughout the same 8-year period by using the β concept from the Capital Asset Pricing Model. Several econometric regressions involving the use of dummy variables as an alternative to the Chow test have been conducted to determine β , a measure of S-REITs defensiveness. The results suggest that S-REITs become less defensive during and after the subprime crisis than before. More specifically, the study shows that during and after the subprime crisis, industrial and retail S-REITs are more defensive than S-REITs of other sectors. This finding paves the way for future research into the risks and defensiveness of specialized and diversified S-REITs, an important issue given that the Singapore’s REIT industry is expected to expand significantly in the future.