Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs
Abstract
:1. Introduction
1.1. Aims of Study
1.2. Research Questions
2. Literature Review
2.1. Australian Real Estate Investment Trust
2.2. Studies on A-REITs
- The relationship between REITs and other traditional investment assets classes, e.g., direct real estate investment, securities, and bonds (Danso 2022; Nguyen et al. 2022; Hoesli and Oikarinen 2012; Giannarelli and Tiwari 2021; Boudry et al. 2012; Giliberto 1990).
- The evaluation of REITs’ performance indices, or commentary on REITs’ roles as substitutive investment vehicles, focusing on the prominent features including risk-adjustment, portfolio diversification, and market sensitiveness (Soyeh et al. 2021; Zhu et al. 2020; Eibel 2020; Sari et al. 2020; Lin et al. 2019; Erol and Tyvimaa 2019; Glabadanidis 2014; Lee and Lee 2012; Chikolwa 2011).
- The contribution of REITs in achieving Environmental, Sustainability and Governance (ESG) goals (Vieira de Castro et al. 2020; Siew 2015).
- The first three categories have been thoroughly investigated, especially with the assistance of econometric methods. The last one is relatively more novel and is less related to this study. The detailed illustration of the existing studies is presented in the subsequent Literature Review Section.
2.3. Two Important Time Periods
2.4. The Role of REITs and Their Relationship with Other Investment Vehicles
2.5. Mixed Outcome of Direct-Indirect Real Estate Relationship Studies
3. Methodology
[…] ‘eligible investment business’ covers investing in ‘land’ for the purpose of deriving rent and/or investing or trading in various financial instruments including units in unit trusts, shares in companies’ loans and derivatives.1
- (a)
- Tenant composition (the business sectors of the tenants),
- (b)
- Tenant profile by occupied area,
- (c)
- Weighted average lease expiry (WALE),
- (d)
- Capitalization rate/weighted average capitalization rate,
- (e)
- Age of building,
- (f)
- Occupancy rate,
- (g)
- NABERS3 rating.
Hypothesis
4. Data and Results
4.1. The Selection of Subject A-REIT
4.2. Data Illustration
- Revenue, including rental income (accounted for over 80% of the total revenue), gain on derivative financial instruments, and interest income.
- Expenses, including rates, taxes, and other property outgoings, management fees, financial costs, loss on fair value of investment properties, and other expenses. The largest proportion of the Expenses category normally goes to statutory expenditures such as rates and taxes, administrative expenditures such as management fees, and financial costs.
- Assets, including current assets and non-current assets. Current assets mostly consist of cash (and cash equivalents) and investment properties held for sale. The major part of non-current assets is investment properties, which accounts for almost 100% of the total.
- Liabilities, including current and non-current liabilities. Current liabilities are trade and distribution payables. Non-current liabilities are mostly borrowings.
- Equity. Equity consists of issued capital and retained earnings (or accumulated losses).
- Cash flows. Cash flows are recorded in three streams: cash flows from operating activities, from investing activities, and from financing activities. Net cash generated by operating activities and proceeds from borrowings are the major cash inflows. Repayment on borrowings is the major cash outflow.
- Funds from operations (calculated by step one, REITs earning measures),
- Dividend per unit (recorded in the Financial Statements),
- Average yield on dividend per unit,
- Gearing (defined as total borrowings less cash divided by total assets less cash and goodwill, recorded in the Financial Statements),
- Yearly total security holder return.
- Property asset book value,
- Property occupancy rate,
- Portfolio WALE,
- Average building age,
- Sustainability ratings.
4.3. Result
5. Discussion
5.1. Results Discussion
5.2. Limitations
- The model specification,
- The robustness of the results of the regression,
6. Conclusions
Supplementary Materials
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
1 | The definition of ‘land’ includes fixtures on the land and certain moveable property (e.g., chattels) customarily supplied, being a property that is incidental and relevant to the renting of the land and ancillary to the ownership and utilization of the land. Ineligible activities are regarded as trading activities. |
2 | The net asset value (NAV) is an adjustment of the value of real estate assets based on the fair value of assets in the balance sheet. The value of the shareholders’ equity is calculated by subtracting revalued liabilities from the fair value of assets. The following formula is used to define NAV: . |
3 | NABERS stands for the National Australian Built Environment Rating System. It can be used to measure a building’s energy efficiency and carbon emissions, as well as the water consumed and the waste produced, and compare it to similar buildings (NABERS n.d.). |
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Direct Property | REIT | ||
---|---|---|---|
PGI | 180 | PGI | 180 |
Vacancy | −9 | Vacancy | −9 |
Operating Expenses | −71 | Operating Expenses | −71 |
NOI | 100 | NOI (property level) | 100 |
General and Administrative Expenses | −3 | ||
Interest Expense | −40 | EBITDA | 97 |
Interest Expense | −40 | ||
Depreciation Expense | −20 | FFO | 57 |
Depreciation Expense | −20 | ||
GAAP Net Income | 40 | GAAP Net Income (Dividends ≥ 0.9 × Net Income = 33.3) | 37 |
Add back Depreciation | +20 | Add back Depreciation | +20 |
CapEx | −15 | CapEx | −15 |
EBTCF | 45 | AFFO (FAD) | 42 |
(Available for plowback up to: 8.7) | |||
Div/FFO as low as 33.3 ÷ 57 = 58%, | |||
Div/FAD = 33.3 ÷ 42 = 79% |
Assumptions about Growth Environment | Comments |
---|---|
Case 1: No Expansion [no plowback (p = 0), DIV1 = AFFO1] | REIT as a passive, pass-through entity that owns a static portfolio of properties. DIV growth, gE is growth in EBTCF from existing assets in place; growth in same-store levered property income. |
Case 2: Internally Financed Expansion but No Growth Opportunities | REIT grows by reinvesting p% of AFFO each year; DIV is less than AFFO. REIT buys properties identical to the ones it currently owns, at market value (i.e., NPV = 0), using retained AFFO and debt, keeping a constant debt/equity ratio → REIT equity value is unchanged from case 1. Div. growth, g, exceeds same store EBTCF (and AFFO) growth, gE but the REIT’s price/earnings (E/AFFO) ratio is same as in Case 1. |
Case 3: Internally Financed Expansion and Growth Opportunities + | Here, REIT is perceived to have the ability to find and execute NPV > 0 deals or projects, possibly at times due to differential pricing in public versus private real estate markets. g* incorporates future increases in AFFO due to such positive NPV growth opportunities into the growth rate in the GGM; it “merges” the impact of growth opportunities into gg, thus g* > g, and the Case 3 REIT’s price/earnings (E*/AFFO) ratio is greater than that of Cases 1 or 2. |
Item | 06/15 | 06/16 | 06/17 | 06/18 | 06/19 | 06/20 | 06/21 |
---|---|---|---|---|---|---|---|
Portfolio Property Rental Income | 18,757,117 | 39,536,000 | 41,385,000 | 777,025,000 | 108,859,000 | 146,341,000 | 161,805,000 |
111% | 5% | 86% | 41% | 34% | 11% | ||
Non-Current Asset Value-Property | 323,110,000 | 398,730,000 | 609,950,000 | 836,300,000 | 1,321,475,000 | 2,085,650,000 | 2,046,221,000 |
23% | 53% | 37% | 58% | 58% | −2% | ||
COF Market Capitalization ($m) | 241.87 | 251.77 | 440.81 | 596.76 | 988.74 | 1034.45 | 1198.32 |
4% | 75% | 35% | 66% | 5% | 16% |
Independent Variables | Dependent Variable | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Financial Year | Total Property Asset Book Value ($m) | Portfolio Cap Rate | Net Lettable Area (sqm) | Property Occupancy (By lncoms) | Property WALE | Weighted Average Building Age (By value) | Weighted Average NAERS Energy Rating (Stars) | Weighted Average NAERS Water Rating (Stars) | COF Gearing | COF FFO ($m) | New Leases (sqm) | Renewal Leases (sqm) | ASX-Listed Tenant Composition (By Rental lncome) | Government Tenant Composition (By Rental lncome) | Dividend (Cent per Share) |
2022 (HY) | 2254 | 5.65% | 302,700 | 94.30% | 4.3 | 16.87 | 4.8 | 3 | 33.10% | 54.7 | 4854 | 13,816 | 27% | 25% | 4.15 |
2021 | 2014 | 5.81% | 287,007 | 93.10% | 4.3 | 17.27 | 4.8 | 3.3 | 33.50% | 233 | 26,388 | 25,689 | 26% | 27% | 4.12 |
2020 | 2053 | 6.93% | 304,586 | 98.10% | 4.7 | 16.32 | 4.8 | 3.3 | 34.50% | 85.4 | 5392 | 26,987 | 25.10% | 25.40% | 4.45 |
2019 | 1400 | 6.22% | 218,080 | 98.40% | 3.9 | 15.8 | 4.6 | 3.2 | 34.20% | 61.2 | 5463 | 16,295 | 27% | 11% | 4.36 |
2018 | 930.5 | 6.68% | 183,339 | 98.90% | 4 | 19.51 | 4.0 | 2.2 | 28.30% | 44.1 | 6985 | 10,985 | 30% | 15% | 4.53 |
Total Property Asset Book Value ($m) | Portfolio Cap Rate | COF Gearing | COF FFO ($m) | |
---|---|---|---|---|
Multiple R | 0.715 | 0.814 | 0.467 | 0.600 |
R Squared | 0.511 | 0.663 | 0.218 | 0.360 |
Adjusted R Squared | 0.349 | 0.551 | −0.042 | 0.147 |
Standard Error | 0.146 | 0.122 | 0.185 | 0.167 |
Intercept Coefficients | 4.730 | 2.116 | 5.417 | 4.455 |
X Variable 1 Coefficients | 0.000 | 36.415 | −3.346 | −0.001 |
Property Occupancy (By Income) | Net Lettable Area (sqm) | Weighted Average Building Age (By Value) | |
---|---|---|---|
Multiple R | 0.954 | 0.616 | 0.347 |
R Squared | 0.911 | 0.379 | 0.12 |
Adjusted R Squared | 0.881 | 0.172 | −0.173 |
Standard Error | 0.062 | 0.165 | 0.196 |
Intercept Coefficients | −1.958 | 4.846 | 3.569 |
X Variable 1 Coefficients | 6.504 | 0.000 | 0.044 |
Weighted Average NAERS Energy Rating (Stars) | Weighted Average NAERS Water Rating (Stars) | |
---|---|---|
Multiple R | 0.692 | 0.582 |
R Squared | 0.479 | 0.339 |
Adjusted R Squared | 0.306 | 0.118 |
Standard Error | 0.151 | 0.17 |
Intercept Coefficients | 5.978 | 5.023 |
X Variable 1 Coefficients | −0.361 | −0.232 |
ASX-Listed Tenant Composition (By Rental lncome) | Government Tenant Composition (By Rental lncome) | |
---|---|---|
Multiple R | 0.436 | 0.569 |
R Squared | 0.190 | 0.323 |
Adjusted R Squared | −0.080 | 0.098 |
Standard Error | 0.188 | 0.172 |
Intercept Coefficients | 3.165 | 4.618 |
X Variable 1 Coefficients | 4.283 | −1.433 |
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Li, X.; Zhang, Y.; Zhang, X.; Gu, R. Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs. Int. J. Financial Stud. 2023, 11, 29. https://doi.org/10.3390/ijfs11010029
Li X, Zhang Y, Zhang X, Gu R. Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs. International Journal of Financial Studies. 2023; 11(1):29. https://doi.org/10.3390/ijfs11010029
Chicago/Turabian StyleLi, Xinyi, Yuhong Zhang, Xing Zhang, and Runtang Gu. 2023. "Analyzing the Relationship between the Features of Direct Real Estate Assets and Their Corresponding Australian—REITs" International Journal of Financial Studies 11, no. 1: 29. https://doi.org/10.3390/ijfs11010029