PERFORMANCE COMPARISON BETWEEN SPECIALIZED AND DIVERSIFIED REITS

Abstract

The study uses Sharpe ratio as a proxy of risk adjusted return to investigate whether the performance of Real Estate Investment Trusts (REITs) that have diversified by property type differs from the performance of REITs that only specialize in a specific property type. A sample of 63 United States equity REITs were selected in order to measure the performance over the past twelve years starting from 2003. The REITs were also separately examined based on 6 distinct real estate sectors which are Diversified REITs, Hotel and Lodging REITs, Industrial and Office REITs, Residential REITs, Retail REITS and Healthcare REITS.

Panel regression model was employed to examine the impact of firm attribute and macroeconomic variable on the REITs’ risk adjusted return. Firm attribute used are firm size, leverage and market to book ratio while macroeconomic variables are GDP growth rate, inflation and interest rate. The study has found that diversified REITs have a lower risk adjusted return than specialized REITs. However, specialized REITs tend to have higher volatility which means greater risk involved. Overall, the performance of diversified REITs does not shown any significant superior difference when compared to property specific REITs. The analysis results also revealed that macroeconomic factors explain more about risk adjusted return when compared to firm attributes.