REIT PORTFOLIO PERFORMANCE : SPECIALIZED vs. DIVERSIFIED S-REITS

Abstract

REITs that spread their asset holdings across property types or geographic regions typically defend their diversification strategy by claiming there is no reduction in portfolio performance and that there are sufficient asset management skills that can be tapped from external advisors for the various property sectors or relevant geographic concentrations. This study investigates whether specialized Singapore REITs (S-REITs), by property type and geography, outperform diversified S-REITs thus providing evidence of superior management expertise associated with specialized S-REITs. The share return performances of specialized versus diversified S-REIT portfolios are compared by examining abnormal returns using the Jensen alpha model. I find evidence of superior performance associated with S-REITs specializing in a single property type or geography. On the contrary, diversified REITs consistently underperform specialized REITs, during both the economic growth cycle and also during market corrections. Also, contrary to conventional theory regarding diversification benefits in modern portfolio theory, diversified S-REITs are also seen from the analysis to be more susceptible to market shocks, suggesting that specialized S-REITs offer better hedging benefits during market corrections.