S-REITS AND INDUSTRY TYPE: SPECIALIZED VS DIVERSIFIED

Abstract

REITs that pursue property type diversification strategy typically deny the existence of diversification discount and claim that diversification enables them to explore new opportunities with attractive yields. This study aims to test the impact of diversification strategies by property type on cash flows, expenses and valuation metrics of Singapore REITs (S-REITs), and identify the most appropriate diversity measures taking into consideration of the small S-REITs sample size. Different diversity measures are applied in this study including asset-based Hirschman-Herfindahl Index (!!"#), revenue-based Hirschman-Herfindahl Index (!!"$) and number of asset type (%&'(), and they are computed based on 35 sample S-REITs for the periods from 2002 to 2015. These three diversity measures are found to be equally effective but are subject to limitations, hence all three measures are used in the analysis for robustness of the results. Multi-variate and univariate performance analyses are performed to investigate the relationships between diversification and REITs performance; and the results support superior performance associated with S-REITs specializing in a single property type. The multivariate analysis though shows that diversified S-REITs incur higher operating expenses, the univariate analysis, however, produces results contrary to that, revealing that the nature of the disparate property types in the portfolio of diversified S-REITs might not differ much and do not require additional management skills.