International Journal of Real Estate Studies, Volume 9 Number 1
2015
A LITERATURE REVIEW ON DIVERSIFICATION STRATEGY OF MALAYSIAN
REAL ESTATE INVESTMENT TRUST (M-REIT) AND IT’S PERFORMANCE
Tiong Chai Ping1 and Rohaya Abdul Jalil2
1
Department of Real Estate, Faculty of Geoinformation and Real Estate
Centre for Real Estate Studies, Institute for Smart Infrastructure and Innovative Construction
Universiti Teknologi Malaysia
81310 UTM Skudai Johor, Malalysia
Email: [email protected]
2
Abstract
The aim of this paper is to review the performance of Malaysia REITs based on property type. Previous study has
found that Malaysian REITs received poor response from investors both local and international. The study had
shown that the underperformance of Malaysian REITs was linked to the unique characteristics of REITs’ property
allocation. Some studies on REITs or real estate portfolio, however, have used property type as the determinant to
examine their risk and return performance. This may show that the property type is the important determinant which
can influence the performance of REITs. The lack of local study on this determinant of influence on performance of
Malaysian REITs is a research gap, which needs to be explored that can provide more insight of it.
Keywords: Diversification, Economic location, Property Types, REITs
1.0
INTRODUCTION
Real Estate Investment Trust (REIT) is one type
of indirect real estate investment. REIT is owned
by listed companies that owns and actively
manage the portfolio of high quality income of
real estate such as commercial office, hotel,
retail mall etc. In general, REIT must invest at
least 50% of its total assets in real estate and the
principal assets of the companies governing the
REIT must be real estate (REITs Guidelines,
2012). Although REIT is being listed in the
stock market but the rental income secures the
income stream. REIT is required to distribute its
90% of taxable income to shareholders annually
in the form of dividends. So, these
characteristics of REIT makes it as a hybrid
investment, offering liquidity as stock and the
income stream, secured by a long lease in
quality commercial real estate (Newell, 2012).
Furthermore, REITs are investment vehicles,
which are able to provide wider diversification
opportunities, greater liquidity of funds, ease of
operations, and the ability to diversify at any
level of investments (Chan et al., 2002 and Zietz
et al., 2003).
In year 1989, Malaysia introduced Property
Trust Fund (PTF) market but received limited
support from the investors due to structural
factor (Newell and Osmadi, 2010). This led to
the establishment of first Malaysian REITs in
August 2005 after Securities Commission of
Malaysia issued new guidelines for M-REITs.
Besides, the successful introduction of REITs in
other Asian countries such as Japan, Hong Kong
and Singapore encouraged Malaysia to
developed REITs. However, Malaysian REITs
received inadequate response from institutional
investors (Jalil and Hishamuddin, 2015).
Jalil and Hishamuddin (2015) stated that one of
the reasons of unattractiveness of Malaysian
REITs was the difference of property location as
the financial performance of REITs is influenced
by location. In addition, the study of Newell and
A Literature Review on Diversification Strategy of Malaysian
Real Estate Investment Trust (M-Reit) and Its Performance
Osmadi (2010) pointed out that strategic
property locations is one of the key factors
influencing the performance of M-REITs after
conducting a survey with property and REITs
fund managers. Difference in property type of
REIT may result in different performance. Jalil
and Hishamuddin (2015) found that the type of
underlying property of REITs is one of the
determinants, which influences the performance
of M-REITs. For example, REITs, which focus
on only single type of property in their property
portfolio, will enjoy large liquidity than REITs
with several types of property in its portfolio
(Danielsen and Harrison, 2007). Besides,
Gyourko and Neilling (1996) stated that the
property type of REITs invested in influence the
systematic risk of REITs. Then, Hartzell et al.
(1986) noted that there is low correlation
between different types of properties while they
were analyzing the returns on an institutional
real estate portfolio. They suggest that
diversification across property types might have
benefits.
Basically, property location and property types
are two common factors which used to explain
the performance of real estate portfolio
(Eichholtz et al., 1995). In term of property
location, some past researchers such as Hartzell
et al. (1986), Shulman and Hopkins (1988),
Muller and Ziering (1992), Muller (1993) and
Anderson et al. (2001) have pointed out that
compared to geographical locations; economic
location is the alternative effective approach in
order to construct the property portfolio. This
will be discussed further in the section below.
Extensive research to examine the performance
of REITs by employed property type and
property locations have been conducted in U.S
and U.K. However, little is studied in Malaysia
about the performance of REITs in terms of
analysis of both the property type and property
locations of REITs. This is relevant specifically
to equity investors, whether local or
international who are interested to enter the
Malaysian REITs market especially in term of
property type and location of REITS. Both are
discussed below. Section 2 discusses the
relevant literature on REITs property type, while
section 3 is on the relevant literature of REITs
International Journal of Real Estate Studies, Volume 9, Number 1, 2015
property type followed by discussion of the
review.
2.0
RELEVANT
REVIEW
ON
PROPERTY TYPE OF REITS
Typically, the portfolios of REITs are classified
as specialized if the REITs portfolio held is 75%
or more in one type of property. Whereas, if a
REIT has held less than 75% of its portfolio
invested in any one-property type, then it is
classified as diversified (Ambrose and
Linneman, 2001; Benefield et al., 2008).
Generally, REITs are invested in high value and
high profile real estate such as hotel, shopping
mall or office tower in Malaysia (Wong, 2015).
Besides, some REITs markets are invested not
only in commercial building but also residential
and industrial (Pham, 2012).
According to Newell (2012), the quality of
underlying asset of REITs is one of the attractive
investment features for investors to invest in
REITs. Generally, the main revenue of the
REITs stock is from the rental income. Thus, the
property type will influence the market share
price of REITs, as different types of property are
subjected to charge for different rental rate based
on local property market.
There have been some previous study reviews
on the performance of REITs based on property
types. According to study of Capozza and Lee
(1995), the stock market will place higher values
in retail REITs and lower value on warehouse
REITs based on the local property market.
Hartzell et al. (1986) noted that the correlation
between different property types was low and
suggests that the diversification across property
types in REITs might have benefits. In addition,
the research of Khoo, Hartzell and Hoesli (1993)
show that the levels of information increasing
along with more analyses done based on the
property types of equity REITs. Benefield,
Anderson and Zumpano (2009) mentioned that
when a particular REIT is exposed to various
property types then the return of the REITs is
not subject much to the return of any particular
property category. This shows that the return of
REITs can be diversified across different
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A Literature Review on Diversification Strategy of Malaysian
Real Estate Investment Trust (M-Reit) and Its Performance
property types. For example, when residential
properties performed poorly, retail properties
might be performing particularly well.
Gyourko and Nelling (1996) mentioned that the
property types of REITs portfolio are influenced
by the systematic risk of the REIT. They
conducted a study by employed asset and equity
betas as dependent variable and descriptive of
REIT’s property type composition and size as
independent variable to run a regression
analysis. Results of the study showed that the
systematic risk of REITs are different and
depends on the property type of that particular
REIT owns. The results show that REIT which
focus on retail property consist of higher beta
compare to REIT focus on industrial or
warehouse property in US REITs. Moreover, the
other important findings from the study of
Gyourko and Nelling (1996) also pointed out
that REIT which holds only retail property tend
to have 50% beta higher than the REIT holding
industrial properties only. Hence, the retailoriented REITs have significantly higher beta
than industrial-oriented REITs. This shows that
although retail-oriented REITs will give high
return as compensation for high systematic risk.
This results support by the later study of Han
and Ziobrowski (2011) who examine the
abnormal return of specialized REITs and
diversified REITs by employ Capital Asset
Pricing Model (CAPM) to measure and show
that the specialized REITs have higher market
risk than diversified REITs. Intuitively, these
studies reveal the benefit of diversified REIT in
different property types.
Chen and Peiser (1999) note that the property
type diversified REITs performed poorly
compared to most of the specialized REITs
categories. This finding was supported by the
study of Morri et al. (2008), which stated that
the diversified are more risky and less levered
because of its low collateral value of assets. In
contrast, there are some findings from the
mainstream
corporate
finance
literature
indicating that the REITs which focus on one
property type will perform well compare to
REITs with diversified property type and the
survey reported by Johnson (1999) mentioned
that when a REIT company focuses on one
International Journal of Real Estate Studies, Volume 9, Number 1, 2015
property type, it
management cost.
will
avoids
increased
Majority of empirical research, mainly done in
United State REITs market, show that the
property type will have effect on the
performance of REITs and it is one of the
common factors to explain the performance of
REITs too. Malaysian REITs are invested in
different types of property and offer opportunity
to investors for numerous property types to
invest such as commercial offices, retail malls,
hotels, healthcare and warehouses. In
consideration of a different opinion and the lack
of local study on the influence of property type
on REITs’ performance, it is perhaps imperative
to explore the matter in Malaysian REITs.
3.0
RELEVANT
REVIEW
ECONOMIC LOCATION
ON
As mentioned above, property location is one of
the common factors to explain the performance
of real estate or indirect real estate investment
vehicle like REITs. Based on the findings of the
previous research, the portfolio diversification
across property location of REITs would
minimize the risk and improve the REITs
performance and it can be considered as
effective portfolio investment strategy (Florida
and Roulac, 2007; Worzala and Bajtelsmit,
1997). Generally, the quality of location is
dependent on the economic activities, which
occur on these locations (Mahoney et al., 2000).
In short, location is important to all immovable
properties and this seems to be reasonable
because location determines the rent level of the
properties. Therefore, this signifies that the
financial performance of REITs is correlated to
the location of properties.
In Malaysia, location is an important factor to
REITs (Newell and Osmadi, 2010; Jalil and
Hishamuddin, 2015). Jalil and Hishamuddin
(2015) stated that the unique difference of
location of Malaysian REITs make it difficult
for investors to evaluate the REITs investment.
This indirectly will cause Malaysian REITs
become unattractive to investors. For instance,
Sunway REIT properties are mainly located at
the Central Business District (CBD) such as
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A Literature Review on Diversification Strategy of Malaysian
Real Estate Investment Trust (M-Reit) and Its Performance
Kuala Lumpur, as Sunway REITs focus on retail
and hotel business. Meanwhile, Axis REITs are
located on their industrial properties at industrial
areas, which have different economic location
values compared to Sunway REITs properties.
So, it obviously shows that the REITs
companies will locate their properties in the
location, which is essential to the business.
This study focuses on economic location of the
property rather than geographical location. It is
common to use the traditional geographical
location, whereby the performance of REIT can
be reflected through diversification of location.
However, Hartzell et al. (1986), Shulman and
Hopkins (1988), Muller and Ziering (1992,
Muller (1993) and Anderson et al. (2001) have
studied real estate portfolio construction by
grouping the property locations in term of
economic base. Hartzell, Shulman and
Wurtzebach (1987) point out the issues in
previous study, which looked at the
diversification on regional base in real estate
portfolio. They have segmented the United
States into four regions without considering the
underlying economic activity in those regions.
Thus, their study was segmenting United States
into eight regions, which are based on the
similar economic characteristics. They employed
quarterly data from a large institutional real
estate database from year 1973 through 1987 to
compare diversification by geographical location
with diversification by economic location in
United States. Their results show that the
correlation coefficient among the eight
economic locations were lower than the
traditional four geographic location, hence,
showing
that
the
economic
location
diversification is more effective than the
traditional geographical location diversification
Later, those results were supported by the study
of Anderson et al. (2001). In their study, they
pointed out whether the REITs of these locations
have a similar economic structure and responded
to same economic events? Hence, in order to
solve this issue, Randy and John derived the
economic location by employing multivariate
regression technique known as cluster analysis
on the top 100 MSAs (Metropolitan Statistical
Area), six clusters of MSAs were then identified
International Journal of Real Estate Studies, Volume 9, Number 1, 2015
which are manufacturing centre, financial centre,
government/education, regional distribution,
retirement and small MSAs in the United States.
They grouped the property in the set of
fundamental economic factors which could have
a meaningful impact on the markets over time
such as employment structure, economic growth
pattern, demographic and space distribution by
property type of markets. By using this
methodology for imputing REITs return into
each of the economic locations, their results
revealed the return correlation coefficients are
low between the economic locations. They
suggested that diversification across economic
location of REITs is significant and can reflect
the performance of REITs.
The review of the relevant literature of economic
locations indicates that the performance of
REITs could be driven by different economic
factors in a particular geographical location.
However, many of the studies were done in
United States. There is lack of Malaysian
REITs’ study employing economic location
approach to examine the performance of REITs.
Hence, there is a research gap, which can be
explored in Malaysian REITs.
4.0
DISCUSSION
The relevant literature review for property types
and property location of REITs was essential in
order to identify the determinant that are
significant in assessing the performance of
Malaysian REITs and designing the portfolio
diversification strategy for Malaysian REITs.
Basically, diversification strategy is about the
portfolio allocation in a particular investment.
For real estate portfolio, property type and
property location are two common determinants
to construct a diversification strategy (Eichholtz
et al., 1995) and of course this is applicable for
REITs portfolio too.
These two determinants seem to support and
influence each other based on the relevant
literature. The correlation between real estate
return aggregate by property type and property
locations was found by Eichholtz et al. (1995),
highlighting the usefulness of diversification in
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A Literature Review on Diversification Strategy of Malaysian
Real Estate Investment Trust (M-Reit) and Its Performance
real estate portfolio. Similar view was expressed
by Anderson et al. (2001), indicating influence
of both property location and property type data
on REITs return performance. This is consistent
with previous studies on benefit of REITs’ risk
minimization and the function of diversification
through property type and location for effective
portfolio investment strategy (Florida and
Roulac, 2007; Worzala and Bajtelsmit, 1997).
Thus, it can be concluded that there is
relationship between these two determinants that
influenced each other in examining the REITs
financial performance. Figure 1 below indicates
the relationship of both this determinants
influenced by each other.
Economic
Location
Property
Type
M-REITs Financial Performance
Figure 1: Relationship of property type and economic
location to influence REITs financial performance
The previous study mainly employed REITs
return index from databases sources such as
New York Stock Exchange, American Stock
Exchange etc. This type of data series may not
be a good proxy for future references as they are
secondary data which being extracted by some
econometric tools or software. Thus, in our
study, we are going to get the REITs data from
REITs company annual report in order to have a
good and precise interpretation on REITs
performance. In addition, the previous study on
economic location of REITs (Anderson et al.,
2001) do not consider the rental yield,
occupancy rate and the accessibility of
underlying buildings of REITs; they only
examine monthly total return data for REITs
share for their performance. In this study, the
use of rental yield, occupancy rate and the
International Journal of Real Estate Studies, Volume 9, Number 1, 2015
accessibility of underlying buildings of REITs
will provide more insights to the performance of
REITs and construct more robust portfolio
diversification strategy for REITs based on
property type and economic location of
underlying asset of M-REITs.
5.0 CONCLUSION
The discussion above focused on the two
important determinants, i.e. property type and
economic location for examining the
performance of REITs. Basically, property type
and location are two common determinants used
to develop a REIT portfolio diversification
strategy. The risk and return of different
property type of REITs, either diversified or
specialized, is believed to be different and in the
same time the performance of REITs should be
different across location or region within each
property type.
REITs have been established in Malaysia since
year 2005 and it is an important property
investment vehicle in Malaysia, which can
provide better diversification benefit. However,
Malaysian REITs still receive poor response
from investors especially institutional; compare
to others Asian REITs such as Singapore, Hong
Kong and Japan. The reason for such lack of
interest is not clear, mainly due to the lack of
study and insight of the Malaysian REITs
performance. It is therefore suggested that fresh
study is needed for exploring the performance of
Malaysia REITs according to above two aspects
of them.
ACKNOWLEDMENT
The authors would like to thank the Malaysian
Ministry of Education and Universiti Teknologi
Malaysia dor supporting this research through
Encourgement Grant No. PY/2014/02476.
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