A comparison on the performance and risk diversification benefits of real estate investment trusts in Malaysia and Singapore

This study analyses the investment performance and effectiveness of risk diversification between M-REITs’ and S-REITs’ by comparing their respective Sharpe Ratio, Treynor Ratio and Jensen’s Alpha including the diversification measures (unsystematic risk divided by total risk and one-minus R squared) calculated on each REITs. The study period for M-REITs’ extends from 2007 to 2016 and for S-REITs’ from 2002 to 2016. Results shows that M-REITs’ perform better than S-REITs’ in terms of Sharpe ratio, Treynor ratio, and Jensen’s Alpha. Total risk of S-REITs’ are higher than M-REITs’. The Beta values for both M-REITs’ and S-REITs’ are less than one, implying that both categories of REITs are less risky than the market index. M-REITs’ have lower R-Squared values than S-REITs’, which suggests that M-REITs’ are poorly diversified than S-REITs’ and therefore, M-REITs’ have more diversification opportunities. The diversification measures computed for M-REITs’ are higher than S-REITs’ and would imply that M-REITs’ have better rate of returns if M-REITs’ diversify their risk (higher risk diversification benefits). The findings from this study aims to help investors to make better investment decision when investing in M-REITs’ and S-REITs’. Top and poor performers of M-REITs’ and S-REITs’ are determined in this study. The findings from this study aims to assist investors determine better investment decisions when considering investing in M-REITs’ and S-REITs’.


Introduction
Properties in the sixties were expensive for most people because properties are classified as highly priced assets. Nowadays, Real Estate Investment Trusts (REITs) have become a mainstream of investing in real estate in many countries. Malaysia Real Estate Investment Trusts (M-REITs') and Singapore Real Estate Investment Trusts (S-REITs') have been developed since the 20th century. Significant studies have been conducted in the past to provide a thorough understanding on the important contribution of REITs to broader equity market in order to provide valuable information and guideline to investors and other stakeholders. The purpose of this research is to investigate and compare the investment performance and risk diversification features of M-REITs' and S-REITs' using the classical but well-known standard performance measurement methods, namely Sharpe Ratio, Treynor Ratio and Jensen Alpha. The hypotheses examined for this study are as follows: This research will examine the performance and risk diversification capabilities of M-REITs' and S-REITs'. The research will provide investors insights into the performance and risk diversification benefits. The research intends to develop on existing literature by analysing and providing evidence on the performance and risk diversification benefits of M-REITs' and S-REITs'.

Literature Review
Findings by Hamzah, A.H. et al. (2010) showed the extent of systematic risks in M-REITs' during the economic crisis and post-crisis period while determining the degree of return that REITs will offer compared to the market portfolio during that particular period. The research signified that the risk-adjusted performance of M-REITs' varied from time to time. The overall result of the study concluded that the systematic risk of M-REITs' was significantly higher during economic crisis period compared to post-crisis period. Ng, Lim, Lau, and Yuen (2015) had analysed risk-adjusted performance of sixteen listed property trust in Malaysia from year 2007 to 2015 using the three main standard performance measurement tools: Sharpe Ratio, Treynor Ratio and Jensen's Alpha to estimate risks, returns and riskadjusted performance of the respective M-REITs'. They suggested that investors who invested in M-REITs' will provide a preferable return because all the M-REITs' outperform the market benchmark during that particular period of time. This was consistent with Smith & Shulman (1976) findings that REITs tend to provide a higher return than the market index and saving accounts.  Markowitz's (1952) portfolio theory which emphasized the concept of accomplishing a desirable fund performance for any risk level by utilizing leverage as an evaluation tool. The results from the study provided an optimal impression to investors by assisting them in their investments into REITs. In the Singapore context, Liow (2001) conducted a study to investigate the risk-adjusted investment performance of S-REITs' and its property stocks over the past 25 years. The study employed Sharpe Index and Jensen-Varying Abnormal Return Index to examine the risk-adjusted performance and portfolio return of all the S-REITs' from 1975-1999. The outcome of the study implied that the S-REITs' outperform against the market portfolio with the higher returns and lower risk levels. Another study investigated the overall risk-adjusted performance on Singapore financial vehicles from 1975-1995 such as stock market, property stocks, residential, commercial, and industrial properties (Liow 1997a). The results of the study concluded that there was a significant difference between the excess return generated from owning direct properties and the excess return generated from owning property stocks such as REITs. Peng Liu (2010) identified certain corporate finance issues involving REITs. Capital structure, corporate governance, dividend pay-out policy, and initial public offerings are the main issues involving REITs. The study also explored several regulatory constraints or requirement required to develop a REIT such as distribution requirements, asset requirements, income requirements, and ownership requirements. Hartzell, Sun, and Titman (2006) examined how the corporate governance of a firm affects the REITs investment decisions. The study found that the investment performance of REITs was really dependent on how well the REIT conducts its corporate governance. REITs that adhered to corporate governance lead to positive real estate investment opportunities. The present study contributes to and extends the evaluation on the risk adjusted performance of S-REIT by employing the same performance measurement method as it is applied to M-REIT, and compare the results between the M-REITs and S-REITs with the classical measurement tools of Jensen's Alpha (1968), Sharpe (1966) and Treynor (1965).

DATA AND METHODOLOGY
The sampling data consist of 16 M-REITs' for the period from 2007 to 2016 and 26 S-REITs' for the period from 2002 to 2016. return of the investment will changed in a steady pace. The calculation for standard deviation is shown below: x 100 (2) whereby, Rindex = Index for week t It = Closing index value at the chosen day of week t It-1 = Closing index value at the chosen day of week before week t The standard deviation of each REIT was computed and subsequently, interpreted to determine the volatility each of the REIT against the respective property index (ie FBM Kuala Lumpur Property or FTSE ST REIT). Standard deviation of REITs is a statistical measure of the volatility of the sample weekly return for each REIT. An investment portfolio that has a lower standard of deviation as compared to its benchmark value, may seem preferable for risk averse investors. This is because the lower the value of standard deviation, the lower the risk or uncertainty within the portfolio (for example, the return of the portfolio does not change dramatically over a period of time). An investor who prefer investments with a low standard deviation, the implications will be that the potential Whereby: Xi = weekly return of REITs μ = the mean return of REITs for the year (%) n = sample period (years) Apart from the above, the total risk were computed, which include systematic risk, unsystematic risk and diversification measure, and compared among the 26 S-REITs' and 16 M-REITs'. The formula for calculating the total risk is shown below: σi2= βi2 . σm2 +σe2 (4) Whereby, σi2 = Total risk for REITs βi2 = Square of Beta of REITs σm2 = Variance of return of the market portfolio βi2 σm2 = Systematic risk of REITs σe2 = Unsystematic risk of REITs Two methods were used to calculate the diversification measures of the REITs. Diversification can be defined as a process of allocating capital in order to reduce the exposure to risk. In the investor's' perspective, diversification is a way to reduce volatility by investing in a variety of assets.
The first method is by dividing the unsystematic risk with total risk. If the ratio is closer to 0, it implies that the unsystematic risk of the REIT is less significant. The calculation for diversification measure is shown below: whereby, 2 = Unsystematic Risk of REITs 2 = Total Risk of REITs The second method is one minus R-Squared (1 -R-squared). If the diversification value computed is high, this would mean that the diversification opportunities or risk diversification benefits is high. If the value is near to zero, this means that there is less unsystematic risk in the portfolio and more systematic risk, which cannot be diversify. However, if the diversification measure has a value that is near to one, it would mean that the portfolio consists mainly of unsystematic risks which can be diversify. The calculation of diversification measure is shown below: In addition, the R-square of each REIT are also computed to examine the market movement of a security or portfolio that can be predicted by the movement of portfolio benchmark. The R-squared demonstrates the relationship between the total risk and systematic risk, as it explained the degree of total risk being affected by systematic risk. The formula for calculating the R-Squared value of REITs is shown below: whereby, 2 = R-Squared 2 = Square of portfolio's beta σm2 = Variance of return of the market portfolio βi2 . σm2 = Systematic risk component of REITs σi2 = Total risk The higher the value of R-Squared, the higher the chances of a security or portfolio moving in the same direction with the market index. A high value R-Squared indicates that the inherent total risk within a REIT is aggressively affected by the systematic risk and vice versa. In contrast, if the R-Squared has a low value, it denotes that the security or portfolio does not move along with the market index. In another words, a portfolio with a low value of R-Squared does not act much like the market index. Subsequently, the risk-adjusted performance measures of the REITs are computed using the Sharpe Ratio, Treynor Ratio and Jensen's Alpha to ascertain how the REITs are performing against the risk estimated, as well as, identify the possible excess return from each REIT against the market index. The Sharpe Ratio calculates the excess return earned in the excess of the free rate of return per unit of standard deviation in an investment portfolio. In calculating the Sharpe Ratio, the three main components are free rate of return, average return of the portfolio, and standard deviation or volatility. The standard deviation is used to present the diversity of the returns over a sampling period. The calculation for Sharpe Ratio is shown below: whereby, SR = Sharpe Ratio ri = average return of REITs rf = risk free rate of return = standard deviation of REITs The higher the value of Sharpe Ratio denotes that the portfolio generate a greater return against the portfolio benchmark. Likewise, the Sharpe Ratio with a negative value represents that the portfolio generates a lesser return against the risk-free rate of return. Treynor Ratio is a measurement of the return generated from the investment portfolio on a risk-adjusted basis. The calculation of Treynor Ratio is shown below: whereby, T = Treynor Ratio ri = average return of REITs rf = risk free rate of return i = beta of portfolio To justify the performance of REITs, a Treynor Ratio with a positive value is always preferable in REIT markets. The higher the Treynor Ratio is, the greater the return generated from portfolio against the portfolio benchmark. A Treynor Ratio with a negative value indicates that the estimate of the performance of a REIT is not so optimistic. Jensen's Alpha is an abnormal return evaluation tool that utilizes the capital asset pricing model (CAPM) to estimate the rate of return on the basis of market volatility by measuring the REITs' beta and compare it with the market beta.The given portfolio's beta denotes the volatility of the REITs at the market as a whole. It also represents the risk which has been arising along the market movement. The formula to compute Jensen's Alpha is shown below:   Insert table 1 and table 2 Total market risk of S-REITs' is relatively higher compared to the total market risk of Those S-REITs' with high beta value contribute a high level of systematic risk to the S-REITs' market. From the M-REITs' perspective, the findings showed that the volatility of each M-REIT is low and contributes a lower level of systematic risk than the market portfolio. In short, it can be speculated that M-REITs' is a defensive investment portfolio which ensures the regular portfolio rebalancing; while S-REITs' is a speculative investment portfolio which presents more risks and uncertainties. Table 1 showed that the R-square value of all M-REITs' is relatively lower, with an average value of 0.0454 compared to S-REITs', with an average value of 0.3622, which is about eight times higher than M-REITs''. This can be interpreted that the fund of S-REITs' is highly diversified. In average, the total risks of both S-REITs' and M-REITs' are strongly affected by the unsystematic risk factors rather than systematic risk factors. However, the average diversification measure of M-REITs' is higher than S-REITs', which valued approximately 0.95464 and 0.63781 respectively. For M-REITs', the highest and the lowest diversification value ranged from 0.99942 (Al-'Aqar Healthcare REIT) and 0.87968 (Tower Real Estate Investment Trust). In contrast, the highest and the lowest diversification measure of S-REITs' ranged from 0.95365 and 0.41614, which are Cache Logistics Trust and Suntec Real Estate Investment Trust respectively. This implies that the M-REITs' has greater opportunities for diversification. Table 3 and Table 4 represents the Sharpe, Treynor and Jensen's Alpha ratio analysis of M-REITs' and S-REITs' respectively.
Insert table 3 and table 4  Based on the findings above, the decision rule is not to reject null hypotheses (H0) and reject alternative hypotheses (H1). (Table 5). Firstly, M-REITs' have lower beta compared to S-REITs'. Results of Sharpe ratio, Treynor ratio and Jensen's Alpha proved that M-REITs' have better risk-adjusted performance than S-REITs'. M-REITs' have higher average of Sharpe ratio, Treynor ratio and Jensen's Alpha compared to S-REITs'.

CONCLUSION AND IMPLICATIONS
This study conducted was to compare and analyse the overall performance among the M-REITs' and S-REITs' by The findings suggested that low-risk appetite investors could consider investing in M-REITs' because they carry lower risk as compared to S-REITs' and they outperformed the Malaysia T-Bills (investments in risk free rate of returns) and FBM Kuala Lumpur Property Index.
In conclusion, investors should plan their own strategy throughout their investment plans along with the essential technical analysis of the market cycles. Following by some of the major swings and volatility in the market as well as the economy, the REITs offer certain protection against capital loss, as well as to safeguard the investment values among the investors. Findings of this research may assist both investors as well as readers to understand the total risk involved take into account M-REITs' and S-REITs' by providing useful quantitative experimental valuation of the current and past performance of Malaysia Real Estate Investment Trusts and Singapore Real Estate Investment Trusts to assist investors choose the better investment tool. Moreover, quality of corporate management, trust management, asset quality and also the growth strategy of each REIT has to be evaluated by the investors in order to make a precise investment decision.