Faculty of Business and Law
School of Accounting, Finance and Economics / Finance, Economics, Markets and Accounting Research Centre
The number of Australian Real Estate Investment Trusts (AREITs) trading as stapled securities has grown significantly in the past ten years. Though this type of trust structure improves the income growth to investors, stapled AREITs are riskier relative to traditional AREITs that act primarily as holding companies of property assets. Academic literature on REIT characteristics has found that these assets have become less integrated with bonds and more with stocks. An increasingly mature AREIT market implies that prices of these assets have become more integrated with values of the underlying direct property investments. This study employs quarterly prices over 30 years from 1980 to 2010, and the sample includes 71 AREITs used to construct separate value-weighted indices for stapled and traditional trusts. Using cointegration analysis, this paper aims to examine the relationships of traditional and stapled AREITs with expected and unexpected growth in real estate prices, stocks, bonds, as well as expected and unexpected inflation. Because inflation is driven by changes to real economic activity, and appraisal based direct property indices are prone to a smoothing bias, we also use a set of macroeconomic factors to represent demand for real estate and assess if these have meaningful relationships with traditional and stapled AREITs. These are industrial production and eight employment indices from the construction, entertainment related services, finance and insurance services, public administration and safety, manufacturing, rental and property services, utilities and, wholesale and retail trade sectors. Estimations were conducted with sample periods including and excluding the GFC. Our results show that there is no long-run relationship between AREITs and expected capital growth of retail properties and unexpected capital growth of industrial properties. Stapled AREITs do not exhibit any relationship with unexpected capital growth of office properties. These results only apply when the sample period excludes the GFC. The significance of the error correction term when direct property was assumed as the dependent variable provides support that AREIT prices are significant in explaining expected and unexpected capital growth of direct properties. We also find that in the long-run, AREITs are good hedges against expected inflation, but only stapled AREITs can hedge against unexpected inflation. Estimates of the vector error correction model also indicate that traditional AREITs exhibit short-run adjustments to both stock and bond market factors, whereas stapled AREITs only adjust to stocks. When assessed against a set of macroeconomic variables representing primary demand factors for real estate, we find that traditional AREITs display a significant relationship with industrial production and employment in the construction sector. In the set of secondary demand factors for real estate, we find a persistent long-run relationship for traditional AREITs in periods including and excluding the GFC. Overall, our findings suggest that stapled AREITs do not display a long-run relationship with macroeconomic factors that drive real estate prices, providing further support that stapled AREITs are more like stocks and are poor substitutes for direct property investments.