The risk and return characteristics of sector-specific real estate investment trusts in the Asia-Pacific

Abstract

Asia-Pacific Real Estate Investment Trusts (REITs) have become a significant listed property sector in the international property investment space. One of the prominent attributes of Asia-Pacific REITs is that sector-specific REITs have played a prevailing role in the Asia-Pacific REIT markets compared with diversified REITs. This unique trajectory of sector-specific REITs aligns with the discussion of specialisation value in the finance literature. However, there is a paucity of scholarly literature on REIT specialisation value specifically in the Asia-Pacific region. Unlike previous studies that ignore the fact that various property sectors may characterise distinct market cycles, this research aims to demonstrate the REIT specialisation value by comparing different property types of REITs with diversified REITs from multi-dimensional investment perspectives both investment performance and risk management dimensions.

The conceptual framework of this study aims to compare risk-adjusted returns; portfolio diversification benefits; risk-adjusted performance comparisons; roles in mixed-asset portfolios at domestic, regional and international levels; and interest rate sensitivity of Asia-Pacific sector-specific REITs versus diversified REITs. Additionally, the portfolio returns, risk, geographic and sectoral diversifications, and asset allocations of different property types (e.g. office, retail, industrial, residential and specialty sectors) of regional REIT-based portfolios in the Asia-Pacific are assessed for the first time. To reinforce the REIT specialisation value in the Asia-Pacific region, these analyses will be extended to the US REIT market. The rigorous analyses undertaken in this study validate the existence of REIT specialisation value across the Asia-Pacific region and the USA.

Overall, the findings suggest that institutional investors should actively make their own sectoral portfolio diversification decisions by investing in different property types of REITs, rather than passively relying on a diversified REIT portfolio with multiple property sectors. The findings also validated the investment distinctions of REITs across different property sectors and various markets, including Japan, Australia, Singapore and the USA. This also highlights the importance of a dedicated study of each REIT sub-sector in different REIT markets, providing an insightful understanding of sector-specific REITs in the Asia-Pacific region and the USA.