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Home Bias in Asian REIT Portfolio Investment Strategies
CHAPTER
2
Home Bias in Asian REIT Portfolio Investment Strategies Lucia Gibilaroa and Gianluca Mattaroccib aDepartment
bDepartment
of Management, Economics and Quantitative Methods, University of Bergamo, Italy of Economics and Finance, University of Rome Tor Vergata, Rome 133, Italy
2.1 INTRODUCTION Real estate investment trust (REIT) managers generally prefer to focus on domestic real estate investments (Zhou and Sah, 2009). Clear evidence of home bias exists for the US market, where out-of-state buyers pay a premium for real estate assets due to higher search and transaction costs (Lambson et al., 2004). The Asian REIT industry is quite young—its first REIT was issued in 2001—and is dominated by Japanese and Singapore investment vehicles (J-REITs and S-REITs, respectively) (Ooi et al., 2006). Performance analysis of the Asian REIT industry has focused on the differences among Asian market performances (Tsai et al., 2010) and their role in an international diversified portfolio that considers indirect real estate investments and other types of financial instruments, such as stocks (Yat-Hung et al., 2008). However, no studies provide evidence of the role of home bias in the performance of Asian REITs. Examining REITs in Standard and Poor’s Global REIT Index, this chapter compares the home bias of Asian REITs with that of other countries in the index (mainly the United States and Europe). After identifying the differences in home bias among these markets, we evaluate whether more geographically concentrated Asian REITs achieve higher or lower unexpected performance with respect to less concentrated Asian REITs. The results demonstrate that the degree of REIT home bias differs across countries and that Asian REITs are not always the most geographically concentrated. Empirical analysis of the impact of geographical concentration on performance reveals interesting differences between home-biased and non-home-biased Asian REITs.
2.2 LITERATURE REVIEW To optimize a portfolio’s risk–return trade-off, managers generally try to identify uncorrelated asset classes that could represent diversification opportunities. Comparisons of returns achieved by direct international real estate investments demonstrate a lack of correlation (and sometimes even a negative correlation) between main markets (e.g., Liow, 2010). Therefore, the advantages of an internationally diversified real estate Handbook of Asian Finance, Volume 2 http://dx.doi.org/10.1016/B978-0-12-800986-4.00002-9
© 2014 Elsevier Inc. All rights reserved.
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portfolio are significantly greater than those related to internationally diversified bond or stock portfolios (Eichholtz, 1996). REIT portfolio compositions are almost always dominated by domestic investments with respect to foreign ones and some REITs prefer to not invest at all in foreign countries. The greater significance of domestic assets in managed portfolios is generally explained by investor preferences for domestic over foreign assets (French and Poterba, 1991). This behavioral bias is even greater in real estate investments, where institutional investors (such as real estate mutual funds) normally prefer investing in the home country or in countries with which they are more familiar (Imazeki and Gallimore, 2009). The main explanation for home bias is related to real estate market imperfections that increase information costs, especially for outside investors, who may then be faced with suboptimal investments (e.g., Turnbull and Sirmans, 1993). Empirical evidence supports the hypothesis that REITs focused on a single geographical area are frequently better able to identify the best investment opportunities and to buy these assets at low prices, which allows them to maximize their overall investment portfolio performance (Brady and Conlin, 2004). Another explanation of home bias pertains to operational efficiency, which is normally easy to achieve when investments are concentrated in only a few geographical areas. Empirical analysis of the technical and operational efficiency of REITs demonstrates that the higher the concentration among a few types of assets, the lower the operational costs (Anderson et al., 2002). Due to the great heterogeneity of international real estate investments, the choice to invest in more than one country could imply a significant increase in operational costs (e.g., an increase in the information needed for the evaluation of investment opportunities) and therefore a decrease in overall performance. Independent of the heterogeneity of real estate assets, the choice to invest abroad generally implies an increase in the likelihood of contracting for external property management services and an increase in the costs associated with monitoring dispersed ownerships (Bers and Springer, 1997). A portfolio focused on only domestic assets allows the costs of the service to be minimized and investors can thus maximize returns through an investment strategy focusing on only home-biased REITs, which, ceteris paribus, in turn implies lower service costs. The different levels of efficiency and/or higher monitoring costs can have a direct impact on REIT performance, which investors must consider when selecting the best indirect real estate investment opportunities. Empirical evidence for the US market demonstrates that home bias can have a positive effect on REIT performance but that abnormal returns are not prevalently driven by a home country investment choice (Zhou and Sah, 2009).
Home Bias in Asian REIT Portfolio Investment Strategies
2.3 EMPIRICAL ANALYSIS 2.3.1 Sample The sample considers all REITs listed in the Standard and Poor’s Global REIT Index during 2003–2012, for a total of 303 REITs from 20 countries in five continents (Table 2.1). As expected, the countries with the greatest representation are from the Americas (with the United States representing more than 42% of the overall sample) and those with the least are African (with only one country, South Africa, and only seven REITs). Asian countries are the second most represented in the sample (25%), with REITs distributed throughout, although J-REITs (36) and S-REITs (25) are predominant. This pattern is consistent with the characteristics of the overall Asian market (e.g., Ooi et al., 2011). The sample size varies over time due to new REITs listed for each country each year and the sample at the end of the period, in 2012, is 50% bigger than at the beginning, in 2003. The variability of the sample cannot be reduced by selecting different time periods due to the great fragmentation of new Asian funds issued in the last decade. We collect from datastream all the (daily) market data necessary for the analysis of each REIT. We supplement the data with full details about the REITs’ portfolio compositions, manually collecting this information directly from annual reports published on their Web sites.
Table 2.1 Sample Breakdown by Geographical Area
Breakdown by Year
Country
No.
Country
No.
Year
No.
Australia Belgium Canada France Germany Hong Kong Israel Italy Japan Malaysia Mexico Netherlands
22 4 22 10 2 6 1 2 36 4 1 5
New Zealand Singapore South Africa Taiwan Thailand Turkey United Kingdom United States New Zealand Singapore South Africa Taiwan
5 25 5 1 2 5 13 129 5 25 5 1
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
198 213 228 250 262 271 274 288 296 303
Source: Datastream data processed by the authors.
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2.3.2 Methodology Home bias in an REIT’s investment strategy is measured as a percentage with respect to its overall portfolio, a standard approach in the literature to measure the role of any specific asset class with respect to others (e.g., Newell and Fisher, 2009): Home
Portfolio Valueit Home biasit = Overall Portfolio Valueit
(2.1)
where the home bias is the ratio of the appraisal value of all assets in the home country Home to that of the overall portfolio (Overall PortfolioValueit). To consider Portfolio Valueit the degree of geographic diversification, we also compute a standard concentration measure (Herfindahl, 1950; Hirschman, 1945) on the basis of the appraisal value of each country’s REIT assets, frequently used to compute the degree of real estate portfolio diversification (Capozza and Seguin, 1999): 2 n K Portfolio Valueit HHit = (2.2) Overall Portfolio Valueit k=1 where for the n countries represented in the portfolio, we compute the ratio of the appraisal value of the real estate assets in country k to that of the overall real estate K Portfolio Valueit portfolio managed . The index ranges from zero to one, with higher Overall Portfolio Valueit
values indicating more concentrated portfolios. To evaluate the impact of home bias on REIT returns, we compute the performance differences between home-biased portfolios (fully or prevalently invested in the home country) and geographically diversified portfolios (Anderson and Beracha, 2011). We present summary statistics on the performance achieved The first measure considered is a standard annual REIT performance measure, computed as the natural logarithm of the ratio of the price of the share at time t (plus dividends eventually paid in the year) to the price at time t − 1: Pit + Dit Rit = ln −1 (2.3) Pit−1 Following the US literature on REIT performance evaluation, in addition to considering simple performance, we also construct an unexpected performance measure of the excess return with respect to standard pricing models, such as the capital asset pricing model (CAPM) or Fama–French and Carhart models (Zhou and Sah, 2009). The extra performance achieved by each fund is computed on the basis of the following equations:
CAPM
ARit
M
= Rit − rft − βit (RM ,t − rft )
(2.4)
Home Bias in Asian REIT Portfolio Investment Strategies
F&F
ARit
M
SMB
= Rit − rft − βit (RM ,t − rft ) − βit HML −βit (RHBM ,t
Carhart
ARit
M
− RLBM ,t )
(2.5)
SMB
= Rit − rft − βit (RM ,t − rft ) − βit HML −βit (RHBM ,t
(RSC,t − RLC,t )
(RSC,t − RLC,t ) PY − RLBM ,t ) + −βit (RHPY ,t − RLPY ,t )
(2.6)
Equation (2.4) is the REIT’s abnormal return with respect to the CAPM (Sharpe, 1964). On the basis of the characteristics of our sample, we use the return of a threemonth Treasury bill as a proxy for the risk-free rate (rft) and the Standard and Poor’s M Global REIT Index as a proxy for the market benchmark (RM,t). The term βit is computed with weekly data and measures sensitiveness of REIT returns with respect to the index return in the prior 2 years. Equation (2.5) is the REIT’s abnormal return with respect to the Fama–French model (Fama and French, 1993). The two new factors included in this model with respect to the CAPM are the performance difference between small and large capitalized REITs (RSC,t − RLC,t) and the performance difference between high and lowHML book-to-market REITs (RHBM,t − RLBM,t). Both βitSMB and βit are computed with weekly data and measure sensitiveness of REIT returns with respect to the two indexes (respectively small vs. large and high vs. low-book-to-market value) in the prior 2 years. Equation (2.6) is the REIT’s abnormal return with respect to the Carhart model (Carhart, 1997). The new factor added with respect to the Fama–French model is the performance difference between high and low past performance REITs PY (RHPY,t − RLPY,t). Here βit is computed with weekly data and measures sensitiveness of REIT returns with respect to the index (high vs. low performance) in the 2 years earlier. Summary statistics of the abnormal returns computed with the three models—Eqs. (2.3)–(2.5)—are computed for all Asian countries and (as a benchmark) for all the major international REIT markets.
2.3.3 Results Analysis of the REITs that invest only in the home country shows the differences among Asian REITs and underlines the existence of an outlier (Singapore) in the Asian markets (Table 2.2). Asian REITs are significantly affected by home bias and, excluding Singapore REITs, invest only in their home country, stating in their business description that they are not interested to invest in foreign real estate assets. Comparing Singapore with other countries (not Asian) whose REIT investments are not restricted to the home country, we find that Asian countries exhibit the most significant decrease for funds specialized
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Table 2.2 Percentage of REITs that Invest Only in Home Country Properties 2003 2004 2005 2006 2007 2008 2009
2010
2011
2012
Asia Hong Kong Israel Japan Malaysia Singapore Taiwan Thailand
100 100 100 100 67 100 100
100 100 100 100 65 100 100
100 100 100 100 66 100 100
100 100 100 100 60 100 100
100 100 100 100 56 100 100
100 100 100 100 51 100 100
100 100 100 100 47 100 100
100 100 100 100 45 100 100
100 100 100 100 43 100 100
100 100 100 100 42 100 100
Africa South Africa
83
83
83
84
84
85
85
85
85
85
America Canada 83 Mexico n.a. United States 90
84 n.a. 90
82 n.a. 90
82 n.a. 89
83 n.a. 89
83 n.a. 89
83 n.a. 88
83 n.a. 88
81 100 88
80 100 88
67 50 100 100 20 100 82
67 50 100 100 20 100 82
67 47 100 100 20 100 82
62 46 100 100 20 100 82
59 46 100 100 20 100 80
57 45 100 90 17 100 80
48 44 100 83 14 100 79
45 43 100 79 13 100 79
42 43 100 75 11 100 79
41 43 100 72 10 100 79
Oceania Australia 73 New Zealand 100
71 100
69 100
69 100
69 100
69 94
69 90
69 88
70 87
69 86
Europe Belgium France Germany Italy Netherlands Turkey United Kingdom
Source: Annual report data processed by the authors.
in only national investments (e.g., Belgium), even if other European countries (e.g., Netherlands) are characterized by a degree of real estate portfolio internationalization that is significantly higher than that of Singapore. Focusing on only markets in which at least one REIT portfolio has foreign real estate assets reveals interesting differences between Asian funds (Singapore) and other markets (see Table 2.3). After Netherlands, Singapore is the country with the lowest average percentage of home properties and its spread with respect to the other countries is over 12%. If we consider the Herfindahl–Hirschman index, the concentration of REIT portfolios for
Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average
Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%)
65.60 84.04 99.07 98.25 99.29 91.08 97.24 97.10 92.67 87.38 80.16 74.03 – – 49.11 55.52 96.81 95.46 90.39 87.62 – –
63.00 86.70 99.07 98.25 98.05 90.07 97.30 97.10 93.00 87.85 81.08 74.48 – – 48.18 45.92 96.80 95.20 90.13 88.08 – –
71.33 95.03 99.07 98.25 97.22 82.76 97.43 97.28 94.33 89.96 84.75 78.87 – – 46.61 44.93 96.73 94.90 83.33 86.90 – –
69.10 86.64 99.21 98.50 97.29 84.99 97.31 96.99 93.71 89.08 82.17 74.93 – – 45.18 44.16 96.24 93.95 84.06 86.13 – –
63.03 86.81 99.21 98.50 96.85 85.80 97.21 96.80 92.46 87.21 84.13 76.50 – – 43.90 43.44 87.12 87.04 82.08 84.35 – –
58.59 85.26 99.21 98.50 96.52 85.60 97.26 96.77 86.78 77.80 84.11 76.57 92.50 87.25 40.73 41.50 86.68 86.75 82.03 84.21 82.29 89.67
58.69 84.15 99.21 98.50 97.30 86.72 97.29 96.59 82.67 71.60 82.48 75.36 94.50 90.21 39.18 40.57 86.47 86.73 83.36 85.57 82.29 89.67
2009
58.35 81.77 99.21 98.50 97.33 86.58 97.38 96.61 81.70 70.54 83.48 76.02 95.00 91.00 38.09 38.06 88.65 88.13 82.81 84.75 85.83 91.74
2010
58.21 81.70 99.21 98.50 90.08 88.30 97.30 96.39 79.85 68.44 83.98 76.64 95.40 91.65 32.99 31.64 88.66 89.48 86.42 88.36 85.83 91.74
2011
62.37 82.47 99.21 98.50 89.94 87.92 97.12 96.29 80.55 69.30 82.24 75.04 95.35 91.56 31.97 31.27 89.96 88.56 87.05 88.80 85.83 91.74
2012
Source: Annual report data processed by the authors. Note: In this table home bias is the average percentage of assets under management invested in home country properties and portfolio HH is the average HerfindahlHirschman index of the portfolio, computed on the basis of the country in which the real estate asset is located.
New Zealand
Australia
United Kingdom
Netherlands
Italy
France
Belgium
United States
Canada
South Africa
Singapore
Table 2.3 Geographical Concentration of REITs That do not Invest Only in Home Country Properties 2003 2004 2005 2006 2007 2008
Home Bias in Asian REIT Portfolio Investment Strategies
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Singapore is higher than for the Netherlands and France in all years and in some years even higher than for the United Kingdom and Australia. The higher concentration of Singapore’s REITs with respect to other countries with a greater home country role is related to the choice of portfolio managers, who, in Asia, tend to focus on a small number of countries (home or foreign) compared to European standards; European REITs are characterized by a greater geographical diversification of managed properties due to the high correlations between real estate investments in different European countries (the so-called continental factor), which implies their higher degree of substitutability (Eichholtz et al., 1998). If we compare the yearly results of purely home-biased REITs with geographically diversified REITs (Table 2.4), Asian REITs, on average, have higher spreads. Even if there is a premium in all non-European markets for focusing on domestic investments, none of the non-Asian countries considered shows higher average spreads. The difference is essentially driven by data before the global financial crisis (before 2007), when the difference between home-biased and non-home-biased REITs was less significant than during the crisis. If we adopt a less strict definition of home bias by considering all REITs that invest at least 50% of their portfolios in domestic properties, the results confirm our previous results (Table 2.5). In all five continents, REITs are charged a premium for investing in only the domestic market, with Asian REITs experiencing the highest average home bias premium. These results are also confirmed if we do not take into account overall yield and focus on unexpected returns, using either the CAPM or Fama–French or Carhart as a benchmark. Comparing the average performance of home bias and internationally diversified REITs over the entire period (Table 2.6), we find that purely home-biased Asian REITs have more than a 70% probability of positive performance and more than a 60% probability of achieving performance above that expected with either the CAPM or Fama-French or Carhart model. On average, home-biased REITs in the Americas, Europe, and Oceania have a higher probability of achieving both positive performance and performance above expected values. The results are confirmed for both purely and prevalently home-biased REITs. The main characteristic of Asian REITs is the large difference between home-biased and geographically diversified portfolios. Asian REITs are the only REITs for which less than 60% of financial instruments achieve negative performance or a performance lower than expected (defined according to either the CAPM or the Fama–French or Carhart model). For non-Asian countries, at least half of the funds achieve a positive or higher than expected performance, as defined by one of the three models. Asian homebiased REITs are characterized by more positive performance and more positive extra performance with respect to expectations compared to non-Asian countries, for which there are no differences or less significant ones.
Asia Africa America Europe Oceania
Asia Africa America Europe Oceania
Asia Africa America Europe Oceania
Extra return with respect to CAPM (%)
Extra return with respect to Fama– French model (%)
Extra return with respect to Carhart model (%)
6.16 5.13 2.13 −0.13 1.41
5.91 4.68 2.26 −0.06 1.45
5.01 4.10 2.27 −0.06 0.93
5.16 4.10 2.25 −0.07 0.97
Source: Datastream data processed by the authors.
Asia Africa America Europe Oceania
Yearly return (%)
16.13 – 3.23 −0.74 −6.53
16.15 – 3.18 −0.77 −6.71
16.14 – 3.14 −0.78 −6.67
17.66 – 2.93 −0.92 −6.33
15.00 21.87 −0.30 −5.09 −3.10
15.01 21.84 −0.33 −5.11 −3.24
15.03 21.86 −0.34 −5.12 −3.37
15.03 21.86 −0.34 −5.12 −3.37
8.35 6.20 4.10 −0.13 −1.73
8.40 6.18 4.07 −0.15 −1.77
8.72 5.79 3.87 −0.22 −1.65
8.72 5.79 3.87 −0.22 −1.65
1.01 −8.16 2.55 −7.90 −2.96
1.00 −8.16 2.54 −7.90 −2.95
0.43 −7.80 2.85 −7.71 −3.31
0.43 −7.80 2.85 −7.71 −3.31
−14.13 −5.59 7.26 4.03 14.54
−15.72 −7.10 7.45 3.85 14.61
−15.67 −5.67 7.55 4.04 14.31
−15.67 −5.67 7.55 4.04 14.31
Table 2.4 Average Performance of Purely Home-Biased and Geographically Diversified REITs 2003–2012 2003 2004 2005 2006 2007
3.96 −9.03 −3.28 4.63 8.12
2.08 −10.75 −2.53 4.64 8.72
−6.42 −16.61 −2.82 3.12 1.18
−6.42 −16.61 −2.82 3.12 1.18
2008
3.33 3.37 3.79 −2.89 7.02
3.32 3.49 3.73 −2.98 6.98
3.85 3.41 3.53 −2.45 8.13
3.85 3.41 3.53 −2.45 8.13
2009
4.99 16.06 2.76 −0.60 4.25
4.88 15.53 2.93 −0.25 4.34
5.22 15.07 3.05 0.16 5.74
5.22 15.07 3.05 0.16 5.74
2010
5.28 3.08 0.08 3.87 4.25
6.49 2.70 0.45 4.50 4.08
5.75 2.59 0.47 4.80 4.66
5.75 2.59 0.47 4.80 4.66
2011
17.64 18.38 1.09 3.50 −9.73
17.47 18.35 1.14 3.56 −9.59
17.05 18.27 1.37 3.56 −9.68
17.05 18.27 1.37 3.56 −9.68
2012
Home Bias in Asian REIT Portfolio Investment Strategies
47
Asia Africa America Europe Oceania Asia 6.86 Africa 5.13 America −0.49 Europe 1.66 Oceania 2.99
Extra return with respect to Fama–French model (%)
Extra return with respect to Carhart model (%)
Source: Datastream data processed by the authors.
6.57 4.68 0.80 1.73 3.04
7.39 4.10 4.41 1.80 2.74
Asia Africa America Europe Oceania
Extra return with respect to CAPM (%)
7.55 4.10 4.27 1.77 2.75
Asia Africa America Europe Oceania
Yearly return (%)
16.13 15.00 8.35 – 21.87 6.20 −16.59 −16.54 −4.65 2.76 −6.68 7.77 5.40 1.63 0.99
16.15 15.01 8.40 – 21.84 6.18 −16.61 −16.56 −4.70 2.78 −6.69 7.74 5.28 1.60 1.01
16.14 15.03 8.72 – 21.86 5.79 −16.67 −16.65 −5.07 2.75 −6.68 7.64 5.42 1.61 1.07
17.66 15.03 8.72 – 21.86 5.79 −18.11 −16.65 −5.07 2.45 −6.68 7.64 5.52 1.61 1.07
2009
1.01 −14.13 15.04 −8.73 −8.16 −5.59 −9.03 3.37 −5.45 22.01 −11.68 16.69 −21.91 7.67 12.51 −2.81 1.61 13.28 8.12 5.88
1.00 −15.72 12.93 −8.60 −8.16 −7.10 −10.75 3.49 −5.46 22.02 −10.06 16.48 −21.93 6.85 12.80 −3.02 1.61 13.32 8.72 5.86
0.43 −15.67 17.47 −6.38 −7.80 −5.67 −16.61 3.41 −4.55 22.92 31.07 12.99 −21.38 7.62 12.95 −3.69 1.12 13.07 1.18 7.58
0.43 −15.67 17.47 −6.38 −7.80 −5.67 −16.61 3.41 −4.55 22.92 31.07 12.99 −21.38 7.62 12.95 −3.69 1.12 13.07 1.18 7.58
Table 2.5 Average Performance of Prevalently Home-biased and Geographically Diversified REITs 2003–2012 2003 2004 2005 2006 2007 2008
5.59 16.06 15.31 −2.92 2.77
5.01 15.53 16.22 −2.49 2.89
6.64 15.07 13.89 −2.76 4.87
6.64 15.07 13.89 −2.76 4.87
2010
10.90 3.08 2.68 12.54 1.59
12.20 2.70 3.38 13.54 1.47
12.44 2.59 2.42 13.69 2.84
12.44 2.59 2.42 13.69 2.84
2011
19.46 18.38 3.12 7.66 −11.33
19.35 18.35 3.26 7.76 −11.34
19.12 18.27 3.74 7.85 −11.38
19.12 18.27 3.74 7.85 −11.38
2012
48 Lucia Gibilaro and Gianluca Mattarocci
Home Bias in Asian REIT Portfolio Investment Strategies
Table 2.6 Average Performance of REIT Home-Biased and Non-Home-Biased Portfolios, 2003–2012 Type Asia Africa America Europe Oceania
Purely Home-biased Yearly return higher than zero (%) Extra return higher than for CAPM (%) Extra return higher than for Fama–French model (%) Extra return higher than for Carhart model (%)
vs. Internationally Diversified Portfolios HB 70.19 54.71 NHB 40.00 50.00
71.70 72.22
75.23 73.95
75.67 72.00
HB NHB
65.30 40.00
61.11 50.00
64.70 69.21
67.17 68.90
66.00 62.00
HB NHB
63.08 40.00
61.11 50.00
65.17 70.09
69.48 70.57
66.00 67.00
HB NHB
63.08 40.00
61.11 50.00
65.17 69.93
69.48 71.40
66.00 67.00
76.36 66.67
75.24 73.33
68.71 66.67
65.62 63.33
71.10 66.67
65.62 70.00
71.57 66.67
67.17 70.00
Prevalently Home-biased vs. Internationally Diversified Portfolios Yearly return HB 69.48 56.81 71.69 higher than NHB 40.00 50.00 80.00 zero (%) Extra return HB 65.40 61.11 65.38 higher than for NHB 40.00 50.00 100 CAPM (%) Extra return HB 63.59 61.11 65.92 higher than for NHB 40.00 50.00 80.00 Fama–French model (%) Extra return HB 63.59 61.11 66.77 higher than NHB 40.00 50.00 80.00 for Carhart model (%)
Source: Datastream data processed by the authors. Note: In this table HB denotes home-biased REITs and MHB denotes internationally diversified REITs.
2.4 CONCLUSION Asian REIT managers generally prefer to invest in their domestic markets and only in the most developed financial areas; few Asian REITs invest internationally. Focusing on the home market leads to average returns that are higher than those for international investments; the two groups of REITs are also highly heterogeneous, on the basis of the percentage of positive performance as well as that of extra performance.
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Investors interested in maximizing their revenue through investments in Asian countries prefer geographically specialized REITs over internationally diversified REITs. The home bias premium for Asian REITs is positive and their probability of outperforming the benchmark is significantly higher for domestic investment opportunities compared to international ones. Our results are consistent with evidence on the loss in value related to the diversification of REIT portfolios (e.g., Campbell et al., 2006). The assumption of the normality of returns for indirect real estate investment vehicles is criticized and all approaches (e.g., CAPM) applying this assumption could be biased and misleading (Giannotti and Mattarocci, 2013). A more detailed analysis of the performance of home-biased and geographically diversified Asian REITs based on riskadjusted performance measures that do not assume the normality of returns could demonstrate the usefulness of results achieved independently of the assumption of normality.
ACKNOWLEDGMENTS This chapter is the result of the authors’ combined efforts and continuous exchange of ideas. The introduction and literature review are ascribed to Lucia Gibilaro and the other sections are ascribed to Gianluca Mattarocci.
REFERENCES Anderson, C.W., Beracha, E., 2011. Local comovement in REIT returns: implications for portfolio performance. Journal of Real Estate Portfolio Management 17 (2), 13–125. Anderson, R.I., Fok, R., Springer, T., Webb, J., 2002. Technical efficiency and economies of scale: a nonparametric analysis of REIT operating efficiency. European Journal of Operational Research 139 (3), 598–612. Bers, M., Springer, T.M., 1997. Economies-of-scale for real estate investment trusts. Journal of Real Estate Research 14 (3), 275–290. Brady, P.J., Conlin, M.E., 2004. The performance of REIT-owned properties and the impact of REIT market power. Journal of Real Estate Finance and Economics 28 (1), 81–95. Campbell, R.D., White-Huckins, N., Sirmans, C.F., 2006. Domestic and international equity REIT joint ventures: structuring corporate options. Journal of Real Estate Finance Economics 32 (3), 275–288. Capozza, D.R., Seguin, P.J., 1999. Focus, transparency and value: the REIT evidence. Real Estate Economics 27 (4), 587–619. Carhart, M.M., 1997. On persistence in mutual fund performance. Journal of Finance 52 (1), 57–82. Eichholtz, P.M.A., 1996. Does international diversification work better for real estate than for stocks and bonds? Financial Analyst Journal 56 (1), 56–62. Eichholtz, P.M.A., Huisman, R., Koedijk, K., Schuin, L., 1998. Factors in international real estate returns. Real Estate Economics 26 (3), 493–509. Fama, E., French, K., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33 (1), 3–56. French, K.R., Poterba, J.R., 1991. Investor diversification and international equity markets. American Economic Review 81 (2), 222–226. Giannotti C., Mattarocci, G., 2013. The risk measurement choice in selecting REITs: evidence from the US market. Journal of Real Estate Portfolio Management 19 (2), 137–153. Herfindahl, O.C., 1950. Concentration in US Steel Industry. Columbia University, mimeo. Hirschman, A.O., 1945. National Power and the Structure of Foreign Trade. University of California Press, Berkley, CA.
Home Bias in Asian REIT Portfolio Investment Strategies
Imazeki, T., Gallimore, P., 2009. Domestic and foreign bias in real estate mutual funds. Journal of Property Research 26 (4), 367–389. Lambson, V.E., McQueen, G.R., Slade, B., 2004. Do out-of-state buyers pay more for real estate? An e xamination of anchoring-induced bias and search costs. Real Estate Economics 32 (1), 85–126. Liow, K.H., 2010. International direct real estate market linkages: evidence from time-varying correlation and cointegration tests. Journal of Real Estate Literature 18 (2), 283–312. Newell, G., Fischer, F., 2009. The role of residential REITs in REIT portfolios. Journal of Real Estate Portfolio Management 15 (2), 129–139. Ooi, J.T.L., Newell, G., Sing, T.F., 2006. The growth of REIT markets in Asia. Journal of Real Estate Literature 14 (2), 203–222. Ooi, J.T.L., Ong, S.E., Neo, P.H., 2011. The wealth effects of property acquisitions: evidence from Japanese and Singaporean REITs. Real Estate Economics 39 (3), 487–505. Sharpe, W.F., 1964. Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance 19 (3), 425–442. Turnbull, G., Sirmans, C.F., 1993. Information, Search and House Prices. Regional Science and Urban Economics 23 (4), 545–557. Tsai, M.S., Chiang, S.J., Lin, C.H., 2010. A study of REITs in the Asia-Pacific area: volatility characters and their long term relationship with stock indices. Applied Financial Economics 20 (17), 1397–1400. Yat-Hung, C., Joinkey, S.C.K., Bo-Sin, T., 2008. Time-varying performance of four Asian-Pacific REITs. Journal of Property Investment and Finance 26 (3), 201–231. Zhou, X., Sah, V., 2009. Does home expertise exist in equity REITs? Journal of Real Estate Portfolio Management 15 (3), 281–288.
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Home Bias in Asian REIT Portfolio Investment Strategies Lucia Gibilaroa and Gianluca Mattaroccib aDepartment
bDepartment
of Management, Economics and Quantitative Methods, University of Bergamo, Italy of Economics and Finance, University of Rome Tor Vergata, Rome 133, Italy
2.1 INTRODUCTION Real estate investment trust (REIT) managers generally prefer to focus on domestic real estate investments (Zhou and Sah, 2009). Clear evidence of home bias exists for the US market, where out-of-state buyers pay a premium for real estate assets due to higher search and transaction costs (Lambson et al., 2004). The Asian REIT industry is quite young—its first REIT was issued in 2001—and is dominated by Japanese and Singapore investment vehicles (J-REITs and S-REITs, respectively) (Ooi et al., 2006). Performance analysis of the Asian REIT industry has focused on the differences among Asian market performances (Tsai et al., 2010) and their role in an international diversified portfolio that considers indirect real estate investments and other types of financial instruments, such as stocks (Yat-Hung et al., 2008). However, no studies provide evidence of the role of home bias in the performance of Asian REITs. Examining REITs in Standard and Poor’s Global REIT Index, this chapter compares the home bias of Asian REITs with that of other countries in the index (mainly the United States and Europe). After identifying the differences in home bias among these markets, we evaluate whether more geographically concentrated Asian REITs achieve higher or lower unexpected performance with respect to less concentrated Asian REITs. The results demonstrate that the degree of REIT home bias differs across countries and that Asian REITs are not always the most geographically concentrated. Empirical analysis of the impact of geographical concentration on performance reveals interesting differences between home-biased and non-home-biased Asian REITs.
2.2 LITERATURE REVIEW To optimize a portfolio’s risk–return trade-off, managers generally try to identify uncorrelated asset classes that could represent diversification opportunities. Comparisons of returns achieved by direct international real estate investments demonstrate a lack of correlation (and sometimes even a negative correlation) between main markets (e.g., Liow, 2010). Therefore, the advantages of an internationally diversified real estate Handbook of Asian Finance, Volume 2 http://dx.doi.org/10.1016/B978-0-12-800986-4.00002-9
© 2014 Elsevier Inc. All rights reserved.
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Lucia Gibilaro and Gianluca Mattarocci
portfolio are significantly greater than those related to internationally diversified bond or stock portfolios (Eichholtz, 1996). REIT portfolio compositions are almost always dominated by domestic investments with respect to foreign ones and some REITs prefer to not invest at all in foreign countries. The greater significance of domestic assets in managed portfolios is generally explained by investor preferences for domestic over foreign assets (French and Poterba, 1991). This behavioral bias is even greater in real estate investments, where institutional investors (such as real estate mutual funds) normally prefer investing in the home country or in countries with which they are more familiar (Imazeki and Gallimore, 2009). The main explanation for home bias is related to real estate market imperfections that increase information costs, especially for outside investors, who may then be faced with suboptimal investments (e.g., Turnbull and Sirmans, 1993). Empirical evidence supports the hypothesis that REITs focused on a single geographical area are frequently better able to identify the best investment opportunities and to buy these assets at low prices, which allows them to maximize their overall investment portfolio performance (Brady and Conlin, 2004). Another explanation of home bias pertains to operational efficiency, which is normally easy to achieve when investments are concentrated in only a few geographical areas. Empirical analysis of the technical and operational efficiency of REITs demonstrates that the higher the concentration among a few types of assets, the lower the operational costs (Anderson et al., 2002). Due to the great heterogeneity of international real estate investments, the choice to invest in more than one country could imply a significant increase in operational costs (e.g., an increase in the information needed for the evaluation of investment opportunities) and therefore a decrease in overall performance. Independent of the heterogeneity of real estate assets, the choice to invest abroad generally implies an increase in the likelihood of contracting for external property management services and an increase in the costs associated with monitoring dispersed ownerships (Bers and Springer, 1997). A portfolio focused on only domestic assets allows the costs of the service to be minimized and investors can thus maximize returns through an investment strategy focusing on only home-biased REITs, which, ceteris paribus, in turn implies lower service costs. The different levels of efficiency and/or higher monitoring costs can have a direct impact on REIT performance, which investors must consider when selecting the best indirect real estate investment opportunities. Empirical evidence for the US market demonstrates that home bias can have a positive effect on REIT performance but that abnormal returns are not prevalently driven by a home country investment choice (Zhou and Sah, 2009).
Home Bias in Asian REIT Portfolio Investment Strategies
2.3 EMPIRICAL ANALYSIS 2.3.1 Sample The sample considers all REITs listed in the Standard and Poor’s Global REIT Index during 2003–2012, for a total of 303 REITs from 20 countries in five continents (Table 2.1). As expected, the countries with the greatest representation are from the Americas (with the United States representing more than 42% of the overall sample) and those with the least are African (with only one country, South Africa, and only seven REITs). Asian countries are the second most represented in the sample (25%), with REITs distributed throughout, although J-REITs (36) and S-REITs (25) are predominant. This pattern is consistent with the characteristics of the overall Asian market (e.g., Ooi et al., 2011). The sample size varies over time due to new REITs listed for each country each year and the sample at the end of the period, in 2012, is 50% bigger than at the beginning, in 2003. The variability of the sample cannot be reduced by selecting different time periods due to the great fragmentation of new Asian funds issued in the last decade. We collect from datastream all the (daily) market data necessary for the analysis of each REIT. We supplement the data with full details about the REITs’ portfolio compositions, manually collecting this information directly from annual reports published on their Web sites.
Table 2.1 Sample Breakdown by Geographical Area
Breakdown by Year
Country
No.
Country
No.
Year
No.
Australia Belgium Canada France Germany Hong Kong Israel Italy Japan Malaysia Mexico Netherlands
22 4 22 10 2 6 1 2 36 4 1 5
New Zealand Singapore South Africa Taiwan Thailand Turkey United Kingdom United States New Zealand Singapore South Africa Taiwan
5 25 5 1 2 5 13 129 5 25 5 1
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
198 213 228 250 262 271 274 288 296 303
Source: Datastream data processed by the authors.
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2.3.2 Methodology Home bias in an REIT’s investment strategy is measured as a percentage with respect to its overall portfolio, a standard approach in the literature to measure the role of any specific asset class with respect to others (e.g., Newell and Fisher, 2009): Home
Portfolio Valueit Home biasit = Overall Portfolio Valueit
(2.1)
where the home bias is the ratio of the appraisal value of all assets in the home country Home to that of the overall portfolio (Overall PortfolioValueit). To consider Portfolio Valueit the degree of geographic diversification, we also compute a standard concentration measure (Herfindahl, 1950; Hirschman, 1945) on the basis of the appraisal value of each country’s REIT assets, frequently used to compute the degree of real estate portfolio diversification (Capozza and Seguin, 1999): 2 n K Portfolio Valueit HHit = (2.2) Overall Portfolio Valueit k=1 where for the n countries represented in the portfolio, we compute the ratio of the appraisal value of the real estate assets in country k to that of the overall real estate K Portfolio Valueit portfolio managed . The index ranges from zero to one, with higher Overall Portfolio Valueit
values indicating more concentrated portfolios. To evaluate the impact of home bias on REIT returns, we compute the performance differences between home-biased portfolios (fully or prevalently invested in the home country) and geographically diversified portfolios (Anderson and Beracha, 2011). We present summary statistics on the performance achieved The first measure considered is a standard annual REIT performance measure, computed as the natural logarithm of the ratio of the price of the share at time t (plus dividends eventually paid in the year) to the price at time t − 1: Pit + Dit Rit = ln −1 (2.3) Pit−1 Following the US literature on REIT performance evaluation, in addition to considering simple performance, we also construct an unexpected performance measure of the excess return with respect to standard pricing models, such as the capital asset pricing model (CAPM) or Fama–French and Carhart models (Zhou and Sah, 2009). The extra performance achieved by each fund is computed on the basis of the following equations:
CAPM
ARit
M
= Rit − rft − βit (RM ,t − rft )
(2.4)
Home Bias in Asian REIT Portfolio Investment Strategies
F&F
ARit
M
SMB
= Rit − rft − βit (RM ,t − rft ) − βit HML −βit (RHBM ,t
Carhart
ARit
M
− RLBM ,t )
(2.5)
SMB
= Rit − rft − βit (RM ,t − rft ) − βit HML −βit (RHBM ,t
(RSC,t − RLC,t )
(RSC,t − RLC,t ) PY − RLBM ,t ) + −βit (RHPY ,t − RLPY ,t )
(2.6)
Equation (2.4) is the REIT’s abnormal return with respect to the CAPM (Sharpe, 1964). On the basis of the characteristics of our sample, we use the return of a threemonth Treasury bill as a proxy for the risk-free rate (rft) and the Standard and Poor’s M Global REIT Index as a proxy for the market benchmark (RM,t). The term βit is computed with weekly data and measures sensitiveness of REIT returns with respect to the index return in the prior 2 years. Equation (2.5) is the REIT’s abnormal return with respect to the Fama–French model (Fama and French, 1993). The two new factors included in this model with respect to the CAPM are the performance difference between small and large capitalized REITs (RSC,t − RLC,t) and the performance difference between high and lowHML book-to-market REITs (RHBM,t − RLBM,t). Both βitSMB and βit are computed with weekly data and measure sensitiveness of REIT returns with respect to the two indexes (respectively small vs. large and high vs. low-book-to-market value) in the prior 2 years. Equation (2.6) is the REIT’s abnormal return with respect to the Carhart model (Carhart, 1997). The new factor added with respect to the Fama–French model is the performance difference between high and low past performance REITs PY (RHPY,t − RLPY,t). Here βit is computed with weekly data and measures sensitiveness of REIT returns with respect to the index (high vs. low performance) in the 2 years earlier. Summary statistics of the abnormal returns computed with the three models—Eqs. (2.3)–(2.5)—are computed for all Asian countries and (as a benchmark) for all the major international REIT markets.
2.3.3 Results Analysis of the REITs that invest only in the home country shows the differences among Asian REITs and underlines the existence of an outlier (Singapore) in the Asian markets (Table 2.2). Asian REITs are significantly affected by home bias and, excluding Singapore REITs, invest only in their home country, stating in their business description that they are not interested to invest in foreign real estate assets. Comparing Singapore with other countries (not Asian) whose REIT investments are not restricted to the home country, we find that Asian countries exhibit the most significant decrease for funds specialized
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Table 2.2 Percentage of REITs that Invest Only in Home Country Properties 2003 2004 2005 2006 2007 2008 2009
2010
2011
2012
Asia Hong Kong Israel Japan Malaysia Singapore Taiwan Thailand
100 100 100 100 67 100 100
100 100 100 100 65 100 100
100 100 100 100 66 100 100
100 100 100 100 60 100 100
100 100 100 100 56 100 100
100 100 100 100 51 100 100
100 100 100 100 47 100 100
100 100 100 100 45 100 100
100 100 100 100 43 100 100
100 100 100 100 42 100 100
Africa South Africa
83
83
83
84
84
85
85
85
85
85
America Canada 83 Mexico n.a. United States 90
84 n.a. 90
82 n.a. 90
82 n.a. 89
83 n.a. 89
83 n.a. 89
83 n.a. 88
83 n.a. 88
81 100 88
80 100 88
67 50 100 100 20 100 82
67 50 100 100 20 100 82
67 47 100 100 20 100 82
62 46 100 100 20 100 82
59 46 100 100 20 100 80
57 45 100 90 17 100 80
48 44 100 83 14 100 79
45 43 100 79 13 100 79
42 43 100 75 11 100 79
41 43 100 72 10 100 79
Oceania Australia 73 New Zealand 100
71 100
69 100
69 100
69 100
69 94
69 90
69 88
70 87
69 86
Europe Belgium France Germany Italy Netherlands Turkey United Kingdom
Source: Annual report data processed by the authors.
in only national investments (e.g., Belgium), even if other European countries (e.g., Netherlands) are characterized by a degree of real estate portfolio internationalization that is significantly higher than that of Singapore. Focusing on only markets in which at least one REIT portfolio has foreign real estate assets reveals interesting differences between Asian funds (Singapore) and other markets (see Table 2.3). After Netherlands, Singapore is the country with the lowest average percentage of home properties and its spread with respect to the other countries is over 12%. If we consider the Herfindahl–Hirschman index, the concentration of REIT portfolios for
Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average Average
Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%) Home Bias (%) Portfolio HH (%)
65.60 84.04 99.07 98.25 99.29 91.08 97.24 97.10 92.67 87.38 80.16 74.03 – – 49.11 55.52 96.81 95.46 90.39 87.62 – –
63.00 86.70 99.07 98.25 98.05 90.07 97.30 97.10 93.00 87.85 81.08 74.48 – – 48.18 45.92 96.80 95.20 90.13 88.08 – –
71.33 95.03 99.07 98.25 97.22 82.76 97.43 97.28 94.33 89.96 84.75 78.87 – – 46.61 44.93 96.73 94.90 83.33 86.90 – –
69.10 86.64 99.21 98.50 97.29 84.99 97.31 96.99 93.71 89.08 82.17 74.93 – – 45.18 44.16 96.24 93.95 84.06 86.13 – –
63.03 86.81 99.21 98.50 96.85 85.80 97.21 96.80 92.46 87.21 84.13 76.50 – – 43.90 43.44 87.12 87.04 82.08 84.35 – –
58.59 85.26 99.21 98.50 96.52 85.60 97.26 96.77 86.78 77.80 84.11 76.57 92.50 87.25 40.73 41.50 86.68 86.75 82.03 84.21 82.29 89.67
58.69 84.15 99.21 98.50 97.30 86.72 97.29 96.59 82.67 71.60 82.48 75.36 94.50 90.21 39.18 40.57 86.47 86.73 83.36 85.57 82.29 89.67
2009
58.35 81.77 99.21 98.50 97.33 86.58 97.38 96.61 81.70 70.54 83.48 76.02 95.00 91.00 38.09 38.06 88.65 88.13 82.81 84.75 85.83 91.74
2010
58.21 81.70 99.21 98.50 90.08 88.30 97.30 96.39 79.85 68.44 83.98 76.64 95.40 91.65 32.99 31.64 88.66 89.48 86.42 88.36 85.83 91.74
2011
62.37 82.47 99.21 98.50 89.94 87.92 97.12 96.29 80.55 69.30 82.24 75.04 95.35 91.56 31.97 31.27 89.96 88.56 87.05 88.80 85.83 91.74
2012
Source: Annual report data processed by the authors. Note: In this table home bias is the average percentage of assets under management invested in home country properties and portfolio HH is the average HerfindahlHirschman index of the portfolio, computed on the basis of the country in which the real estate asset is located.
New Zealand
Australia
United Kingdom
Netherlands
Italy
France
Belgium
United States
Canada
South Africa
Singapore
Table 2.3 Geographical Concentration of REITs That do not Invest Only in Home Country Properties 2003 2004 2005 2006 2007 2008
Home Bias in Asian REIT Portfolio Investment Strategies
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Lucia Gibilaro and Gianluca Mattarocci
Singapore is higher than for the Netherlands and France in all years and in some years even higher than for the United Kingdom and Australia. The higher concentration of Singapore’s REITs with respect to other countries with a greater home country role is related to the choice of portfolio managers, who, in Asia, tend to focus on a small number of countries (home or foreign) compared to European standards; European REITs are characterized by a greater geographical diversification of managed properties due to the high correlations between real estate investments in different European countries (the so-called continental factor), which implies their higher degree of substitutability (Eichholtz et al., 1998). If we compare the yearly results of purely home-biased REITs with geographically diversified REITs (Table 2.4), Asian REITs, on average, have higher spreads. Even if there is a premium in all non-European markets for focusing on domestic investments, none of the non-Asian countries considered shows higher average spreads. The difference is essentially driven by data before the global financial crisis (before 2007), when the difference between home-biased and non-home-biased REITs was less significant than during the crisis. If we adopt a less strict definition of home bias by considering all REITs that invest at least 50% of their portfolios in domestic properties, the results confirm our previous results (Table 2.5). In all five continents, REITs are charged a premium for investing in only the domestic market, with Asian REITs experiencing the highest average home bias premium. These results are also confirmed if we do not take into account overall yield and focus on unexpected returns, using either the CAPM or Fama–French or Carhart as a benchmark. Comparing the average performance of home bias and internationally diversified REITs over the entire period (Table 2.6), we find that purely home-biased Asian REITs have more than a 70% probability of positive performance and more than a 60% probability of achieving performance above that expected with either the CAPM or Fama-French or Carhart model. On average, home-biased REITs in the Americas, Europe, and Oceania have a higher probability of achieving both positive performance and performance above expected values. The results are confirmed for both purely and prevalently home-biased REITs. The main characteristic of Asian REITs is the large difference between home-biased and geographically diversified portfolios. Asian REITs are the only REITs for which less than 60% of financial instruments achieve negative performance or a performance lower than expected (defined according to either the CAPM or the Fama–French or Carhart model). For non-Asian countries, at least half of the funds achieve a positive or higher than expected performance, as defined by one of the three models. Asian homebiased REITs are characterized by more positive performance and more positive extra performance with respect to expectations compared to non-Asian countries, for which there are no differences or less significant ones.
Asia Africa America Europe Oceania
Asia Africa America Europe Oceania
Asia Africa America Europe Oceania
Extra return with respect to CAPM (%)
Extra return with respect to Fama– French model (%)
Extra return with respect to Carhart model (%)
6.16 5.13 2.13 −0.13 1.41
5.91 4.68 2.26 −0.06 1.45
5.01 4.10 2.27 −0.06 0.93
5.16 4.10 2.25 −0.07 0.97
Source: Datastream data processed by the authors.
Asia Africa America Europe Oceania
Yearly return (%)
16.13 – 3.23 −0.74 −6.53
16.15 – 3.18 −0.77 −6.71
16.14 – 3.14 −0.78 −6.67
17.66 – 2.93 −0.92 −6.33
15.00 21.87 −0.30 −5.09 −3.10
15.01 21.84 −0.33 −5.11 −3.24
15.03 21.86 −0.34 −5.12 −3.37
15.03 21.86 −0.34 −5.12 −3.37
8.35 6.20 4.10 −0.13 −1.73
8.40 6.18 4.07 −0.15 −1.77
8.72 5.79 3.87 −0.22 −1.65
8.72 5.79 3.87 −0.22 −1.65
1.01 −8.16 2.55 −7.90 −2.96
1.00 −8.16 2.54 −7.90 −2.95
0.43 −7.80 2.85 −7.71 −3.31
0.43 −7.80 2.85 −7.71 −3.31
−14.13 −5.59 7.26 4.03 14.54
−15.72 −7.10 7.45 3.85 14.61
−15.67 −5.67 7.55 4.04 14.31
−15.67 −5.67 7.55 4.04 14.31
Table 2.4 Average Performance of Purely Home-Biased and Geographically Diversified REITs 2003–2012 2003 2004 2005 2006 2007
3.96 −9.03 −3.28 4.63 8.12
2.08 −10.75 −2.53 4.64 8.72
−6.42 −16.61 −2.82 3.12 1.18
−6.42 −16.61 −2.82 3.12 1.18
2008
3.33 3.37 3.79 −2.89 7.02
3.32 3.49 3.73 −2.98 6.98
3.85 3.41 3.53 −2.45 8.13
3.85 3.41 3.53 −2.45 8.13
2009
4.99 16.06 2.76 −0.60 4.25
4.88 15.53 2.93 −0.25 4.34
5.22 15.07 3.05 0.16 5.74
5.22 15.07 3.05 0.16 5.74
2010
5.28 3.08 0.08 3.87 4.25
6.49 2.70 0.45 4.50 4.08
5.75 2.59 0.47 4.80 4.66
5.75 2.59 0.47 4.80 4.66
2011
17.64 18.38 1.09 3.50 −9.73
17.47 18.35 1.14 3.56 −9.59
17.05 18.27 1.37 3.56 −9.68
17.05 18.27 1.37 3.56 −9.68
2012
Home Bias in Asian REIT Portfolio Investment Strategies
47
Asia Africa America Europe Oceania Asia 6.86 Africa 5.13 America −0.49 Europe 1.66 Oceania 2.99
Extra return with respect to Fama–French model (%)
Extra return with respect to Carhart model (%)
Source: Datastream data processed by the authors.
6.57 4.68 0.80 1.73 3.04
7.39 4.10 4.41 1.80 2.74
Asia Africa America Europe Oceania
Extra return with respect to CAPM (%)
7.55 4.10 4.27 1.77 2.75
Asia Africa America Europe Oceania
Yearly return (%)
16.13 15.00 8.35 – 21.87 6.20 −16.59 −16.54 −4.65 2.76 −6.68 7.77 5.40 1.63 0.99
16.15 15.01 8.40 – 21.84 6.18 −16.61 −16.56 −4.70 2.78 −6.69 7.74 5.28 1.60 1.01
16.14 15.03 8.72 – 21.86 5.79 −16.67 −16.65 −5.07 2.75 −6.68 7.64 5.42 1.61 1.07
17.66 15.03 8.72 – 21.86 5.79 −18.11 −16.65 −5.07 2.45 −6.68 7.64 5.52 1.61 1.07
2009
1.01 −14.13 15.04 −8.73 −8.16 −5.59 −9.03 3.37 −5.45 22.01 −11.68 16.69 −21.91 7.67 12.51 −2.81 1.61 13.28 8.12 5.88
1.00 −15.72 12.93 −8.60 −8.16 −7.10 −10.75 3.49 −5.46 22.02 −10.06 16.48 −21.93 6.85 12.80 −3.02 1.61 13.32 8.72 5.86
0.43 −15.67 17.47 −6.38 −7.80 −5.67 −16.61 3.41 −4.55 22.92 31.07 12.99 −21.38 7.62 12.95 −3.69 1.12 13.07 1.18 7.58
0.43 −15.67 17.47 −6.38 −7.80 −5.67 −16.61 3.41 −4.55 22.92 31.07 12.99 −21.38 7.62 12.95 −3.69 1.12 13.07 1.18 7.58
Table 2.5 Average Performance of Prevalently Home-biased and Geographically Diversified REITs 2003–2012 2003 2004 2005 2006 2007 2008
5.59 16.06 15.31 −2.92 2.77
5.01 15.53 16.22 −2.49 2.89
6.64 15.07 13.89 −2.76 4.87
6.64 15.07 13.89 −2.76 4.87
2010
10.90 3.08 2.68 12.54 1.59
12.20 2.70 3.38 13.54 1.47
12.44 2.59 2.42 13.69 2.84
12.44 2.59 2.42 13.69 2.84
2011
19.46 18.38 3.12 7.66 −11.33
19.35 18.35 3.26 7.76 −11.34
19.12 18.27 3.74 7.85 −11.38
19.12 18.27 3.74 7.85 −11.38
2012
48 Lucia Gibilaro and Gianluca Mattarocci
Home Bias in Asian REIT Portfolio Investment Strategies
Table 2.6 Average Performance of REIT Home-Biased and Non-Home-Biased Portfolios, 2003–2012 Type Asia Africa America Europe Oceania
Purely Home-biased Yearly return higher than zero (%) Extra return higher than for CAPM (%) Extra return higher than for Fama–French model (%) Extra return higher than for Carhart model (%)
vs. Internationally Diversified Portfolios HB 70.19 54.71 NHB 40.00 50.00
71.70 72.22
75.23 73.95
75.67 72.00
HB NHB
65.30 40.00
61.11 50.00
64.70 69.21
67.17 68.90
66.00 62.00
HB NHB
63.08 40.00
61.11 50.00
65.17 70.09
69.48 70.57
66.00 67.00
HB NHB
63.08 40.00
61.11 50.00
65.17 69.93
69.48 71.40
66.00 67.00
76.36 66.67
75.24 73.33
68.71 66.67
65.62 63.33
71.10 66.67
65.62 70.00
71.57 66.67
67.17 70.00
Prevalently Home-biased vs. Internationally Diversified Portfolios Yearly return HB 69.48 56.81 71.69 higher than NHB 40.00 50.00 80.00 zero (%) Extra return HB 65.40 61.11 65.38 higher than for NHB 40.00 50.00 100 CAPM (%) Extra return HB 63.59 61.11 65.92 higher than for NHB 40.00 50.00 80.00 Fama–French model (%) Extra return HB 63.59 61.11 66.77 higher than NHB 40.00 50.00 80.00 for Carhart model (%)
Source: Datastream data processed by the authors. Note: In this table HB denotes home-biased REITs and MHB denotes internationally diversified REITs.
2.4 CONCLUSION Asian REIT managers generally prefer to invest in their domestic markets and only in the most developed financial areas; few Asian REITs invest internationally. Focusing on the home market leads to average returns that are higher than those for international investments; the two groups of REITs are also highly heterogeneous, on the basis of the percentage of positive performance as well as that of extra performance.
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Lucia Gibilaro and Gianluca Mattarocci
Investors interested in maximizing their revenue through investments in Asian countries prefer geographically specialized REITs over internationally diversified REITs. The home bias premium for Asian REITs is positive and their probability of outperforming the benchmark is significantly higher for domestic investment opportunities compared to international ones. Our results are consistent with evidence on the loss in value related to the diversification of REIT portfolios (e.g., Campbell et al., 2006). The assumption of the normality of returns for indirect real estate investment vehicles is criticized and all approaches (e.g., CAPM) applying this assumption could be biased and misleading (Giannotti and Mattarocci, 2013). A more detailed analysis of the performance of home-biased and geographically diversified Asian REITs based on riskadjusted performance measures that do not assume the normality of returns could demonstrate the usefulness of results achieved independently of the assumption of normality.
ACKNOWLEDGMENTS This chapter is the result of the authors’ combined efforts and continuous exchange of ideas. The introduction and literature review are ascribed to Lucia Gibilaro and the other sections are ascribed to Gianluca Mattarocci.
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