RISK-ADJUSTED RETURN OF SINGAPORE REAL ESTATE INVESTMENT TRUSTS

Abstract

Extremely competitive yields and low inherent risk of REITs have led to the phenomenal growth of Asian Real Estate Investment Trusts (REITs) since their introduction in 2001. Differences in location, portfolio specialization and regulatory structure of REITs provide investors with a wide variety of instruments with which they can diversify their portfolios. Foremost amongst Asian REIT markets is Singapore. The weighted total returns of Singapore REITs 12 months prior to 2007 stood at 64.7%, trumping all other REIT markets in the world. This is particularly impressive when we compare it to equities and stocks which have higher risks yet yield lower returns. Despite the stellar performance of Singapore REITs (S REITs), not much research has been done to determine the financial and real estate characteristics which influence their returns. This is important as similar research on other markets cannot be assumed to be directly relevant to Singapore due to differences in real estate environments, regulatory structures and stock market characteristics. Rather than using standard asset pricing models based on risk such as the Capital Asset Pricing Model (due to relatively inefficiency of REIT and stock markets), we developed an empirical model adopted from past studies by Cheng and Roulac (2007) and Redman and Manakyan (1995). Our results found that Singapore REITs which yield better risk-adjusted returns have good value for price, are profitable, have low debt-related risk and volatility, are smaller in size and more actively traded, are Retail in nature and are focused on local property investments. The behaviour of S REIT returns in response to earnings history is also similar to that of stocks. These results also seem to be evidence in favour of the increasing integration of REITs with equities and the inconsistency of risk pricing models.