did specialised reits outperform diversified reits during the credit crunch? evidence from the uk...

Leonard Lin MRICS, [email protected]

Did Specialised REITs outperform Diversified REITs during the Credit Crunch? Evidence from the UK

ERES 2013 Annual Conference, Vienna Austria

Prepared by Leonard D. Lin


This research looks at the return and risk characteristics of the Diversified and Specialised REITs during the Credit Crunch (Source: Bloomberg).

The methods circulate multiple factor, Sharpe Ratio, Treynor & Jenson’s Alpha, portfolio construction (value weighted and equal weighted), and efficient frontier modelling.

The hypothesis: the Specialised REITs can perform better than the Diversified counterpart during the Credit Crunch.

Acknowlements: Professor Tony Key, Mr Stephen Lee and Dr Fotis Mouzakis (supervisor) for giving me the inspiration, support and guidance to complete this paper in September 2011, forming part of the requirement for MSc Real Estate at Cass Business School, City University London.

ABSTRACT & ACKNOWLEDGEMENT


“Focus” and “Value” are being debated, diversification across property types adversely affects value, not necessarily mean “under performance” (Capozza & Seguin 1999).75 US REITs data from 1985 to 1992.

Motivations behind this shift (Geltner & Miller 2001):Management speciality and cost efficiency can be better achieved by

the Specialised REITs. Investors make their own portfolio diversification decisions mixing

Specialised REITs. For analysts and stock markets, the Specialised REITs are easier to

understand and analyse.

The UK is relatively young in the development of REITs as the UK REIT Legislation has only come in force on January 1st, 2007. In this instance, the scope of the UK REITs surveyed in this research is comprised of 21 REITs (Source: Bloomberg).

INTRODUCTION & BACKGROUND


Key past studies: Benefield et al. 2009:

75 US REITs, 1995 – 2006, Diversified REITs did better when the economy/market did well Limited evidence that Specialised REITs would have performed better in the recession periods

Ro & Ziobrowski 2009: 100+ US REITs, 1997 – 2006, Diverisfied REITs did better, Specialised REITs have higher market risk

Lee & Stevenson 2005: 144 UK observations (not REITs) 1987 – 1998, Diversified funds have superior performance Focused on real estate funds in the UK– “within a region” versus “cross region”

Eichholtz et al. 1995: US data 1983 – 1992, retail has more diversification potential across regions than within regions UK data 1977 – 1993, the results suggest full diversification, across property types and regions would

be best Investigated the real estate portfolio(s) from “one type in one region”, to “mixed types in one region”,

to “mixed types in multiple regions” Retail property investments, diversification across regions is more effective, but US and UK results vary.

None of these studies were primarily focusing on the Specialised REITs’ performance in the Recessions.

This research takes a closer look at the Specialised REITs’ performance against the Diversified REITs from 2007 to 2011.

AIM & RESEARCH


Defining a Specialised REIT: a REIT is comprised of 75% of the same property type (Benefield et al. 2009)

Return Data (Jan 2007 – Dec 2011): weekly returns. It has been demonstrated that shorter time periods can be just effective in performance rating (Grinblatt & Titman 1989). Chen & Peiser (1999): Diversified REITs performed poorly compared to the

most of the Specialised REITs, by monthly return data from 1993 to 1997.

Using simple statistical ranking tools such as Mean returns, Standard deviations, correlations and value

weighted indexPerformance ranking methods of Sharpe, Treynor and Jensen’s

AlphaConstructing and comparing portfolio performance – Value

weighted & equal weighted

LITERATURE & METHOLODOGIES


23 REITs on the REITA’s list of UK REITs (REITA.ORG 2011). REITA describes, rather than classifies the sectors that the

REITs invest in with terms – diversified, self storage, retail, offices, industrial, residential, and health care.

Bloomberg records 21 REITs with return series (Bloomberg 2011). Bloomberg uses classifications more consistently –

diversified, storage, office property, warehouse/industrial, retail and health care.

The two classify REITs inconsistently.

There are 10 conflicted labels after the author cross-referenced the two major sources (see the REIT Classification table below).

CLASSIFING REITS


In summary, out of the 21 REITs, there are 10 diversified REITs and 11 specialised REITs. *In this research, a REIT will be labelled as a “specialised” REIT if it is comprised of 75% or more of the same property type with its portfolio, for more than half of the sample period (Benefield et al. 2009).

REIT RE-CLASSIFICATIONREIT Name Sector Label by REITA.ORG Sector Label by Bloomberg Label for Proposed Research

1 Big Yellow Group Self Storage Storage Storages2 British Land Diversified Diversified Diversified3 Caiptal Shopping Retail Diversified Retail4 Derwent London Offi ces Diversified Diversified5 *Glenstone Property Group Retail, offi ces, industrial n/a n/a (no return data available)6 Great Portland Estates Offi ces Offi ce Property Offi ces7 Hammerson Retail, offi ces Diversified Diversified8 Hansteen Industrial Warehouse/Industrial Industrial9 Highcroft Investments Diversified Closed-end funds Diversified

10 Land Securities Diversified Diversified Diversified11 Local Shopping REIT Retail Diversified Retail12 London & Stamford Property Offi ces, Retail Diversified Diversified13 McKay Securities Offi ces Diversified Offi ces14 Metric Property Investments Retail Diversified Retail15 Mucklow (A & J) Group Offi ces, Industrial Diversified Diversified16 NewRiver REIT Retail n/a Retail17 *Pineapple corporation Residential, Industrial n/a n/a (no return data available)18 Primary Health Group Health Care Health Care Healthcare19 Shaftesbury Retail Diversified Diversified20 Segro PLC Industrial Diversified Industrial21 Town Centre Securities Retail Diversified Retail22 Warner Estate Retail Diversified Diversified23 Workspace Group Offi ces, Industrial Offi ce Property Diversified24 *Vector Hopsitality n/a Hotels and Motels Hotels (no return data available)

Diversified Labels 7 14 10Non Diversified Labels 14 5 11No Labels 2Total 21 21 21Note: * refers to these return data not made available on Bloomberg


STATISTICS OVERVIEW

REITs portfolios and REIT Indices are conducted on market value & equal weighted basis.

On value weighted basis, the Diversified REITs did marginally better with a higher return and a lower standard deviation.

On equal weighted basis, the Diversified REITs return is the least attractive, comparing to all REITs.

Period (2007 - 2011)

Sector# of

REITsMarket Cap

(£m) Return St. Dev Skewness Kurtosis Return St. Dev Skewness Kurtosis

Diversified Property REIT Portfolio 10 1335.30 -0.47% 7.98% 0.16 3.90 -0.87% 7.60% 0.73 6.81Specialsed Property REIT Portfolio 9 585.07 -0.66% 9.08% -0.19 4.75 -0.53% 7.39% 0.78 6.40Offi ce REIT Index 2 85.56 0.11% 8.01% 0.43 3.95 -0.58% 8.01% 1.13 6.25Retail REIT Index 3 261.20 -0.86% 9.37% -0.38 3.57 -0.72% 9.38% 0.55 6.75Industrial REIT Index 2 189.96 -0.85% 12.17% 0.03 5.31 -0.49% 10.03% 0.44 6.24Healthcare REIT Index 1 13.12 -0.19% 2.09% 0.49 2.24 -0.19% 2.09% 0.49 2.24Storage REIT Index 1 35.23 -0.62% 10.88% 0.95 7.60 -0.62% 10.88% 0.95 7.60

Note: The number of REIT indicates the number of REITs used to construct each porfolio or index. All data are on monthly basis. Two Retail REITs that started in 2009 and 2010 were removed from this analysis due to short data trend.

Value Weighted Equal WeightedAverage Monthly


The finding indicates that the FTSE EPRA/NAREIT UK REIT Index performs more closely to FTSE Small Cap Index with a positive correlation of 0.83.

This is in line with Lee’s view – REITs performing like small caps (Lee 2011a).

FTSE EPRA/NAREIT UK REIT INDEX


The correlation statistics show that the Specialised REITs perform more closely and share more

systematic risk with the FTSE Small Cap Index, with a positive correlation of 0.71.

CORRELATION MATRICS


The historical monthly returns chart shows some observations of the Specialised REITs especially in

the downside periods between Year 2007 and 2010. Specialised REITs index was volatile than the

counterpart Diversified REITs index in some periods.

HISTORICAL VALUE WEIGHTED MONTHLY RETURNS


PORTFOLIO CONSTRUCTION• Only six (6) diversified REITs have the yearly break down of

the property-type components. These REITs are used to construct the Diversified REIT portfolio.

• British Land, Land Securities and Hammerson REITs are

larger than the other three REITs included in the portfolio.

• To compensate for the larger REITs in the portfolio, a diversified REITs portfolio on an equal-weighted basis is constructed.

Pie chart shows the composition

of the six (6) Diversified REITs in terms of the

combined market

capitalisation.

BLND 34.22%

WNER 0.36%

MKLW 1.38%

HCFT 0.20%

LAND 42.36%

HMSO 21.49%

Compositions of diversified REIT portfolio

BLND

WNER

MKLW

HCFT

LAND

HMSO


PORTFOLIO CONSTRUCTION (VALUE-WEIGHTED)• Diversified REITs are aggregated and weighted by market

capitalisation within a portfolio for the calculation of the sector proportions, i.e. diversifications.

• The portfolio is then constructed to match the diversified sector weights.

• The proportions of the Offices, Retail, Industrial and Others within the diversified REIT portfolio are 37%, 48%, 1% and 14% respectively.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Offices Retail Industrial Shopping Residential Others

Specialised REIT portfolio usign the overall property type %

Offices

Retail

Industrial

Shopping

Residential

Others


PORTFOLIO CONSTRUCTION (EQUAL-WEIGHTED)• Under the equal-weighted basis, the retail component drops

20%, whilst the industrial component increases to 20%.

• The office component stays much the same in both the value-weighted and equal-weighted basis.

• The proportions of the Offices, Retail, Industrial and Others within the diversified REIT portfolio are 36%, 33%, 20% and 11% respectively.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Offices Retail Industrial Shopping Residential Others

Specialised REIT portfolio usign the overall property type %

Offices

Retail

Industrial

Shopping

Residential

Others


The sample of the returns and standard deviations are all calculated for the time period commencing January 2007 (ending July 2011), with fifty-three (53) months of monthly return

data.

PORTFOLIO PERFORMANCE RESULTSAs the results from the efficient frontier suggest, the performance of the diversified REITs and specialised REITs under the value-weighted basis is of only a marginal difference. At a similar level of the monthly return, the specialised REITs portfolio produces the return with less volatility.

The specialised REITs portfolio under the equal-weighted construction produces a better mean return at a similar level of the volatility.

Portfolio Performance Summary

AverageMonthly

Div REITPortfolio

Spec REITPortfolio

Div REITPortfolio

Spec REITPortfolio

Mean -0.63% -0.60% -1.21% -0.67% Std. Dev. 8.36% 7.48% 8.04% 7.63%

Value Weighted Equal Weighted


TREYNOR & JENSON’S ALPHA RATIOSTreynor and Jensen measures take into account of the correlation between the market index (FTSE Small Cap index) and the respective REIT’s return.

Overall, the Specialised REITs outperform the Diversified REITs by showing better average fund managers’ management abilities and by showing better average fund managers’ forecasting abilities.

Portfolio Performance Summary

Ticker Sector Treynor Ratio Jensen's Alpha Avearge Treynor Jensen'sBLND Divr -0.52 0.01 Div -0.42 0.09DLN Divr 0.07 0.33 Spec -0.36 0.17HCFT Divr -0.01 0.32 All -0.40 0.13HMSO Divr -0.20 0.15LAND Divr -0.52 0.01MKLW Divr -0.06 -0.21 SHB Divr 0.13 0.21WKP Divr -0.12 0.52WNER Divr -2.60 -0.51 PHP Healthcare -1.82 0.04HSTN Ind 0.01 0.18SGRO Ind -0.24 0.17GPOR Offi ces 0.03 0.26MCKS Offi ces -0.51 0.02CSCG Retail -0.23 0.18TCSC Retail -0.09 0.36BYG Storage -0.08 0.16

Period 2007 – 2011, UK REITs


REGRESSION ANALYSIS

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

3 Year Sharpe Ratios

3 Year Sharpe

h𝑆 𝑎𝑟𝑝𝑒=𝛼+𝛽1𝐴𝑔𝑒+𝛽2𝑆𝑖𝑧𝑒+𝛽3𝐷𝑒𝑏𝑡+𝛽4𝐸𝑓𝑓𝑔𝑖+𝛽5𝐷𝑖𝑣+𝛽6𝑂𝑓𝑓 +𝛽7𝑅𝑒𝑡𝑎𝑖𝑙+𝛽8 𝐼𝑛𝑑+𝛽9 h𝐻𝑒𝑎𝑙𝑡 +𝛽10𝑆𝑡𝑜𝑟𝑎𝑔𝑒+𝛽11𝑈𝐾+𝛽12𝐸𝑢𝑟𝑜+𝛽13𝐺𝑙𝑜+𝜀


RETURN DATA TESTED

Ticker3 year Sharpe

Age Size Debt EFFGI Monthly Return for Normality (JB test)

Heteroskedasticity White's Test (P-value)

Autocorrelation LM's Test (P-value)

BYG 0.27 4.55 0.01 0.36 0.00 22.6155 0.5239 0.0894BLND 1.37 4.55 0.19 0.38 0.00 0.1232 0.6669 0.1835CSCG -0.44 4.55 0.11 0.52 0.01 2.4746 0.3716 0.7440DLN 2.77 4.55 0.06 0.38 0.05 19.9018 0.0204 0.0877GPG na na na na

GPOR 3.07 4.55 0.05 0.27 0.00 2.6877 0.6662 0.2404HMSO 0.42 4.55 0.12 0.42 0.01 5.0191 0.0718 0.7252HSTN 1.07 4.55 0.02 0.46 0.01 22.6108 0.0901 0.3105HCFT 1.02 4.55 0.00 0.01 0.07 26.9570 0.0002 0.0074LAND 0.31 4.55 0.24 0.38 0.01 0.7501 0.5475 0.1560

LSR 2.72 4.30 0.00 0.61 0.01 3.8404 0.6441 0.4928LSP 2.86 3.72 0.03 0.20 0.01 14.3907 0.6998 0.7883

MCKS 0.23 4.55 0.00 0.47 0.01 28.2433 0.4254 0.5136METP na 1.30 0.01 0.00 0.02 1.2092 0.8641 0.0069MKLW 1.56 4.55 0.01 0.18 0.01 15.8450 0.6124 0.0048NRR na 1.88 0.00 0.65 0.02 8.6167 0.4303 0.6454PC na na na na

PHP 5.24 4.55 0.01 0.57 NA 2.2033 0.1739 0.6130SHB 2.86 4.55 0.05 0.46 0.00 6.6037 0.8384 0.0472

SGRO 0.06 4.55 0.08 0.46 0.01 2.3288 0.3455 0.9575TCSC 1.46 4.55 0.00 0.51 0.01 18.7239 0.2725 0.1275

WNER -1.82 4.55 0.00 0.59 0.02 100.7816 0.0002 0.7430WKP 0.92 4.55 0.01 0.52 0.01 11.4372 0.9502 0.0618VNY na NA na na na

Only 8 REITs which their monthly return data pass the normality, heteroskedasticity and autocorrelation tests.

*It appears that the REITs that have higher leverage (DEBT) ratio also have the non normal return data.


REGRESSION ANALYSIS

Summary Statistics for Variables

AGE: Majority of the REITs commenced since January 2007 with few exceptions of REITS started in mid or late 2009 or 2010.SIZE: each REIT is given a rating proportionately (the market cap of the REIT over the entire REIT market cap)DEBT: based on the total debt / total asset ratio provided by Bloomberg (3 year average)EFFIG: Management efficiency measured by the operating expenses over the total assets (3 year average)DIV: dummy variable, “1” rewarded for a Diversified REITOFF: dummy variable, “1” rewarded for an Office REITRETAIL: dummy variable, “1” rewarded for a Retail REITIND: dummy variable, “1” rewarded for an Industrial REITHEALTH: dummy variable, “1” rewarded for a Healthcare REITSTORAGE: dummy variable, “1” rewarded for a Storage REITUK: dummy variable, “1” rewarded for REITs investing in the UKEURO: dummy variable, “1” rewarded for REITs investing in EuropeGLO: dummy variable, “1” rewarded for REITs investing anywhere outside of the UK and Europe

Variables Mean Max Min Corr pSHARPE3 1.37 5.24 -1.82AGE 4.49 4.55 3.72 -0.28 0.25SIZE 0.05 0.24 0.00 -0.20 0.42DEBT 0.41 0.61 0.01 -0.09 0.70EFFGI 0.01 0.07 0.00 0.00 0.70DIV 0.53 1.00 0.00 -0.09 0.70OFF 0.11 1.00 0.00 0.06 0.80RETAIL 0.16 1.00 0.00 -0.03 0.89IND 0.11 1.00 0.00 -0.18 0.47HEALTH 0.05 1.00 0.00 0.59 0.01STORAGE 0.05 1.00 0.00 -0.17 0.50UK 1.00 1.00 1.00 NA NAEURO 0.16 1.00 0.00 -0.24 0.33GLO 0.05 1.00 0.00 0.21 0.38

Variables

SHARPE RATIOS VS FUND CHARACTERISTICS


All possible models tested & considered Best outcome with five (5) variables


The best outcome is displayed in Table 7 with five (5) variables – DIV, OFF, RETAIL, IND and EURO.

An average VIF of 2.43 is achieved, indicating the multicollinearity problem is being attended and minimised.

In addition, the R-squared is 0.789 and the Adjusted R-squared is 0.261 indicting that these variables individually or combined are significantly related to the excess return performance.

The outcome suggests that over the last three (3) years, the property type specialised REITs (namely the Office and Retail Sectors) and regional diversified REITs (namely the REITs which invest in Germany, France, etc)

produce higher risk-adjusted performance.

REGRESSION RESULTS


SUMMARY

The Specialised REITs track the market more closely.

The Diversified REIT had a low return, comparing to all other REITs.

The Specialised REITs portfolio under the equal-weighted portfolio construction produces a better mean return at a similar level of the volatility, than the Diversified REITs portfolio.

The Office REITs and Retail REITs produce significant impact on the risk-adjusted performance.

In conclusion, the hypothesis that the Specialised REITs can perform better

than the Diversified counterpart during the Credit Crunch is supported.


Thank you

Leonard LinChartered Surveyor [email protected]; +44 794 831 7953

mailto:[email protected]

did specialised reits outperform diversified reits during the credit crunch? evidence from the uk...

Documents

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diversified reits

specialised reits performance

reits source

development of reits

diverisfied reits

us reits data

regions uk data