THE RETURN PROFILE OF ASIA REAL ESTATE INVESTMENT TRUSTS INITIAL PUBLIC OFFERINGS

Abstract

One of the best known patterns associated with the process of going public is the frequent incidence of large initial returns (the price difference measured from the offering price to the market price at the end of the first trading day) accruing to investors of the IPO. It has been more than four years since the advent of Real Estate Investment Trusts (REITs) in Asia, thus it is timely and pertinent to consider the initial-day return performance of REITs in Asia capital markets given the anticipated impact REITs, as an asset class, has on the future of Asia financial markets. As characterized by the consistent pattern in IPO, it seems logical to question does REITs exhibit similar magnitude of underpricing as compared to common stocks, and consequently what are some of the factors which influence the first day returns for REITs. Given the irony of observing share prices rising substantially at the end of the first trading day only for them to underperform the market subsequently, the study also aims to examine the aftermarket performance of Asian REITs. The results from the study indicate that REITs in Asia are generally correctly priced. Asia REITs returns are most sensitive to the ex ante uncertainty surrounding the value of the IPO which is constituted by the composition of property classes in the REITs portfolio. Consequently, information asymmetry theories which are underpinned by information frictions in investors provide more persuasive justification for the differences in first day return of Asia REITs. Lastly, results indicate that Asian REITs, with the exception of Singapore REITs, underperform the market following IPO.