The impact of changing risk characteristics in the A‐REIT sector

Abstract

PurposeThe Australian REIT (A‐REIT) market has undergone significant change over the past ten years with a shift from passive investment strategies to more active investment strategies in an attempt to deliver higher return performance. However, this has dramatically changed the risk characteristics of A‐REITs. Essentially, the sector has become more risky. Factors contributing to the increasing risk profile include: rising gearing levels; greater offshore exposure; evolving management structure towards stapled trusts, and growing market concentration. This paper aims to address these issues.Design/methodology/approachIn an attempt to gauge the impact of the changing risk characteristics over time the paper employs two formal risk measures: time‐varying beta and news impact curves. Both measures indicate that the sector has become more risky. Indeed, it could be argued that the pronounced fall in A‐REIT prices during late 2007 reflects a re‐rating of risk on the upside. The post credit crisis financial climate warrants a review of investment strategies; in particular, growth style investments that may be carrying a high level of embedded risk and opaque income streams.FindingsCurrent market sentiment suggests that investors have become more risk averse, and as such, will refocus on A‐REITs that cater for defensive style investments. Such vehicles will have low to moderate gearing levels, hold quality property assets in their portfolio, limited off‐shore exposure, and employ sound management practices.Originality/valueThe heightened risk‐averse environment presents opportunities for new investment products that provide partial exposure to direct property investment as a way to mitigate excessive equity market volatility.

Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs

“…Supported by such large trading volumes and active transactions, A-REITs-related studies have been well-established by academia. Before the outbreak of the COVID-19 pandemic at the commencement of 2020, there were two critical time periods that concerned researchers: The first was 1997, the Asian Financial Crisis and, second, the Global Financial Crisis between mid-2007 and early 2009 (Newell 2013;De Francesco and Hartigan 2009).…”

“…The changing risk characteristics, such as rising gearing levels, increasing offshore exposure and evolving management structure to stapled trusts, have been factors. A-REITs have been depicted as a defensive style of investment (De Francesco and Hartigan 2009), and the volatility of REITs has been well-connected to the sensitivity of the stock market (Tsai et al 2010;West and Worthington 2006;Danso 2022;Lee 2009;Block 2012).…”

Evaluation of vacant and redundant public properties and risk control

“…All the proposed procedures (e.g. build-up approach, capital asset pricing model) provide that the investment risk "premium"which can be defined as the extra yield gained for holding a risky asset (Kanli, 2008) is increased by the return that a generic investor would gain if the funds allocated to the initiative under analysis were used in risk-free assets and by the expected inflation rate (Damodaran, 2002;Higgins and Ng, 2009;Modigliani and Modigliani, 1997;De Francesco and Hartigan, 2009;Sharpe, 1964;Lintner, 1965).…”