LEASE EXPIRY � OPERATIONAL AND FINANCIAL IMPACT ON S-REITS

Abstract

The main objective of this study is to analyze the effects of the weighted average lease expiry (WALE) towards the operational and financial performance of Singapore Real Estate Investment Trusts (S-REITS). Previous literature often neglects how WALE can affect the performance of a REIT such as the predictability of cash flows, its effect on profitability, as well as the value premium placed by investors. As such, this study aims to revisit the theoretical underpinnings governing lease maturity and uncover the value WALE can offer for a REIT. A regression model over the period of 2005 to 2015 is used for this study.

The empirical findings suggest that longer WALE does lead to enhanced operational and portfolio financial performance in S-REITs. In particular, a longer WALE reduces cash flow volatility for Retail and Industrial REITs. However, volatility increases for Office REITs, possibility impacted by their active early renewal strategy. Longer WALE too reduces profitability due to the expected reduction in rents but provides a premium on firm value relative to the REIT property type. This is based on the theory that REITs with longer WALE reflect better asset quality.

When measured across sub-periods of different market environments, WALE increases profitability in periods of falling rents, as longer leases enable the owner to lock in rents and occupancy while premium on firm value stays consistent. Although investors might see profitability fall with a longer WALE, the premium on firm value overall compensates for the shortfall. Overall, REIT portfolios do conform to expectations as set by how their underlying properties have behaved in existing literature with regards to lease expiry.