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

Abstract

Purpose

The Australian REIT (A‐REIT) market has undergone significant change over the past ten years with a shift from passive investment strategies to more active investment strategies in an attempt to deliver higher return performance. However, this has dramatically changed the risk characteristics of A‐REITs. Essentially, the sector has become more risky. Factors contributing to the increasing risk profile include: rising gearing levels; greater offshore exposure; evolving management structure towards stapled trusts, and growing market concentration. This paper aims to address these issues.

Design/methodology/approach

In an attempt to gauge the impact of the changing risk characteristics over time the paper employs two formal risk measures: time‐varying beta and news impact curves. Both measures indicate that the sector has become more risky. Indeed, it could be argued that the pronounced fall in A‐REIT prices during late 2007 reflects a re‐rating of risk on the upside. The post credit crisis financial climate warrants a review of investment strategies; in particular, growth style investments that may be carrying a high level of embedded risk and opaque income streams.

Findings

Current market sentiment suggests that investors have become more risk averse, and as such, will refocus on A‐REITs that cater for defensive style investments. Such vehicles will have low to moderate gearing levels, hold quality property assets in their portfolio, limited off‐shore exposure, and employ sound management practices.

Originality/value

The heightened risk‐averse environment presents opportunities for new investment products that provide partial exposure to direct property investment as a way to mitigate excessive equity market volatility.

Citation

De Francesco, A.J. and Hartigan, L.R. (2009), "The impact of changing risk characteristics in the A‐REIT sector", Journal of Property Investment & Finance, Vol. 27 No. 6, pp. 543-562. https://doi.org/10.1108/14635780910993159