Should REITs be Specialised or Diversified? Evidence from A-REITs

What is it about?

The research aims to offer some updated international evidence on the notion of specialisation value after the GFC, by comparing all sector-specific A-REITs with diversified A-REITs. The results confirmed the existence of specialisation value in the Australian REIT market from January 2000 to August 2018. The results indicate that the strong investment performance of sector-specific REITs is seen as a compelling Australian investment asset co-existing alongside diversified REITs and Australian major asset classes in institutional investor portfolios in an Australian context, with desirable portfolio diversification benefits with both stocks and bonds for institutional investors seeking portfolio diversifying in Australia. This strongly suggests that institutional investors seeking listed property investment exposure in Australia should consider including sector-specific A-REITs in their mixed-asset portfolios rather than diversified A-REITs. Furthermore, this implies that institutional investors should control their portfolio diversifications by investing in sector-specific A-REITs, rather than leaving it to a diversified A-REIT portfolio. Given the stronger investment performance of sector-specific A-REITs compared with diversified A-REITs, REIT investment advisors should recommend sector-specific A-REITs to their clients who intend to develop a new REITs in Australia. This is clear that sector-specific A-REITs have been a favourable A-REIT structure to meet with the institutional investor appetite.

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Why is it important?

The size of sector-specific REITs in Australia, on average, represented 90.9% of the total assets of the Australian REIT market over the last 18 years, with an increase of 8.3 times since January 2000. Players of sector-specific A-REITs are Scentre Group, Goodman Group, Dexus, Vicinity Centres, Unibail-Rodamco Westfield and Investa Office Fund. A dominant role of sector-specific A-REITs can be explained by the notion of specialisation value in mainstream finance research. The issue was discussed in the US in the pre-GFC context. No comparable study has offered international evidence in the post-GFC context.

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