Performance differences in property‐type diversified versus specialized real estate investment trusts (REITs)

Abstract

Evidence from the corporate finance literature indicates that diversified firms trade at a discount to otherwise comparable specialized firms. However, very little research has addressed whether a similar diversification discount might exist in equity REITs that diversify across property types relative to those specializing in one property type. Using a sample of 75 equity REITs, the existence of a property‐type diversification discount is tested using standard Jensen's Alpha, Treynor Index, and Sharpe Ratio performance ranking methodologies over four commonly employed market proxies. Several variations of these standard tests are also utilized as robustness checks.

Risk-Adjusted Performance of Malaysian Real Estate Investment Trust Funds

“…Diversified REIT i.e., the AmanahRaya REIT is shown to have a relatively poor performance compared to most of the other specialized REIT sectors. Such finding is consistent with those of past studies by Chen and Peiser (1999), Eichholtz et al (2000) and Benefield et al (2009).…”

“…Using standard performance measures of Jensen (1968), Sharpe (1966) and Treynor (1965), Benefield et al (2009) examine the differences in risk-adjusted performance between diversified and specialized REITs. The results show significant performance differences between diversified and specialized REITs and the differences depend on the overall market condition.…”

The Role of Risk Measuresí Choices in Ranking Reits: Evidence from the US Market

“…The more widespread measure used in order to evaluate the risk-return trade off is the Sharpe ratio, a measure of excess return respect to the risk free rate for unit of risk assumed (Brueggman et al, 1984). Empirical analysis of the main drivers of the Sharpe index value demonstrates that the RAP allows to better discriminate among REITs only if they are significantly diversified (Benefield et al, 2009). The role of diversifiable and not diversifiable risk for a real estate investment vehicle is normally analysed using the Treynor index that allow to measure the return for unit of not systemic risk assumed (Ooi and Liow, 2004).…”

“…Normally a high concentration of the investments on the real estate asset class implies higher opportunity to gain profits from the portfolio managed. The general and administrative expenses are related to degree of complexity of the REIT and normally they imply a reduction of the wealth created for the REITs' shareholders due to the higher cost of constructing the optimal portfolios (Benefield, Anderson and Zumpano, 2009). …”

“…The free cash flow from operation are a proxy for the REITs core business revenues and/or costs and the higher is the value the better is the risk-return profile for the investment (Benefield, Anderson and Zumpano, 2009). Self-administration determines differences in the investment policy and normally the choice to be selfadministrated impacts positively on performance and, more generally, on the RAP (Capozza and Seguin, 2000).…”