Pacific Rim Real Estate Society
Faculty of Business and Law
School of Business
Management structures of many Australian REITs have shifted towards internal property management since 2001. Sector returns have been rewarding until the Global Financial Crisis, but rising costs of debt and years of aggressive borrowing have eroded REIT values. Externally managed trusts had relatively higher levels of debt than internally managed counterparts thus increasing the sensitivities to interest rate risks. Yet internally managed REITs engage in a wider set of operating activities which compound market and financial risks. This study uses panel and panel quantile regressions to examine the joint impact of financial leverage and management structure on REIT returns in terms of their sensitivities towards the stock market and changes to interest rates from 1980 to 2013, and how these vary at different parts of an economic cycle. We find that the impact of market returns is greater for internally managed REITs and those with more debt. REITs are only negatively affected by changes to short-term interest rates at the lowest 5% quantile of returns. Changes to long-term interest rates have an adverse effect on REITs only at the upper 75% and 95% quantiles. We consider the possibilities that rental yields and inflationary expectations may offset the influences of financing costs. Internal management appears to compound the effects of the stock market and interest rates on REIT returns. These have implications for investors looking to select REITs as substitutes of direct property investments.