Modelling and Simulation Society of Australia and New Zealand and International Association for Mathematics and Computers in Simulation
Faculty of Business and Law
School of Accounting, Finance and Economics
Australian Real Estate Investment Trusts (AREITs) have experienced substantial growth and popularity since 1993. Amongst the major themes surrounding this sector during this time, were the increased attention from institutional investors, the trend towards and away from property-type diversification, significant merger and acquisition activities which led to increased trust size, the debate between internally versus externally managed trust structures, increased gearing levels, and the focus towards diversification into international property assets. While the AREIT sector had benefit from the increased flow of funds from institutional investors during the 1997 Asian financial crisis, the recent impact of the 2008 global financial crisis has been a negative one, as increased credit margins meant that AREITs found it harder to access capital. Our paper aims to study the sensitivities of annualised AREIT returns from 1990 – 2008 towards a set of seven firm-specific variables and five market-wide risk variables. In particular, we examine the time-varying and cross-sectional differences between the impact of firm size, the degree of leverage, market-to-book ratios, property-type diversification, international diversification, the proportion of institutional investment, and management structure. Our set of market time-varying market risk indicators include, overall Australian market conditions proxied using the S&P/ASX200 Index, yields on 90-day bank Treasury Notes to represent the short-term interest rate, yields on10-year Treasury Bonds to represent the long-term interest rate, and changes to the USD/AUD exchange rate to represent exchange rate risk components. We apply panel regressions for fixed and group effects onto balanced and unbalanced panels, categorised according to three sub-periods to study the major phases of the evolution of the AREIT sector. Our regression results find that the size effect has had a negative impact of returns, but this effect has been diminishing over time. Overall market risk was found to be significant and positive only since 2003, suggesting that more recently, AREITs behave more like stocks and less like defensive assets. Additionally, the relationship with exchange rate risks has been positive in recent years, due to more AREITs choosing to diversify internationally, particularly in the U.S. property markets. Our findings on the relationship between market-to-book ratios and AREIT returns depart from standard finance literature. It appears that the market places a premium on AREITs with higher market-to-book ratios. Compared to REITs in other countries, earlier preference for AREITs diversified across property types have appears to shift towards greater specialisation. We also find contrasting evidence on the impact of international diversification, and that domestic AREITs provided better returns than internationally diversified counterparts. This may be largely due to the fact that the AREITs classified as internationally diversified, primarily held assets in the U.S. rather than from a range of countries. We suggest that perhaps the difficulties in accessing economies of scale in the management of such off-shore properties have precluded these AREITs from holding a more geographically diversified property portfolio. The sensitivities of AREIT returns towards short-term and long-term interest rates also warrant further investigation. Our results are similar to another recent Australian study, but inconsistent with much of the existing literature. The relationship between returns and short term interest rates was found to be positive and significant before 2002, and the relationship with long-term interest rates was found to be negative and significant since 2003, indicating that AREITs exhibit less bond-like characteristics in the past five years.