INFLATION-HEDGING CHARACTERISTICS OF REITS AND PROPERTY STOCKS

Abstract

Inflation hedging capability of different securities is of particular interest to investors when selecting these securities for their portfolio. The main objective of this study is to empirically test the inflation hedging characteristics of property stocks and real estate investment trusts (REITs) in Singapore, and investigate what firm-specific characteristics would provide better inflation hedge for the two securitized real estate assets listed on SGX. While the previous literature found that REITs and property stocks do not hedge against inflation, this study found that only a small fraction of individual property stocks and REITs in Singapore show negative hedge against inflation. The returns of the majority of the property stocks and REITs in the Singapore market have no conclusive relationships with inflation. From the panel regression results controlling for fixed-month effect, it is evident that firm-specific characteristics, which include price to book value, dividend yield, dividend per share, and types of indirect real estate assets (i.e. REITs or property stocks), have significant effects in explaining the hedging capability of the assets. The implication of the above findings is that firm-specific characteristics should be taken into consideration when evaluating inflation hedging characteristics of real estate securities (including REITs). The findings are pertinent, which imply that investors cannot neglect different firm-specific characteristics in determining inflation hedging characteristics of real estate securities.