Determinants of idiosyncratic risk in Singapore real estate investment trust

Abstract

Over the years, Singapore REITs (S-REITs) have developed into a popular alternative investment vehicle to real estate and have consistently outperformed other asset classes in Singapore from December 2007 to 2019. In particular, S-REITs in the Retail, Logistics and Diversified sector, which constitutes the majority of the market capitalization of S-REITs, have displayed unique characteristics and trends. Amidst the rapid rise of e-commerce and the continuous demand for the delivery of goods to consumers, warehouses become increasingly imperative, making the Logistics sector one of the most in-demand asset classes around Asia Pacific Region. As a result, the brick-and-mortar sales growth in the Retail sector hit a rough patch and they merely raised USD$800M in 2019 (Wilson, 2019). The Single-Index Model (Sharpe, 1963) and Panel data regression were exploited to analyze how individual firm-specific factors interact with its idiosyncratic risk from the first quarter of 2006 to third quarter of 2019 in the Retail, Logistics and Diversified sector. The regression results suggest that asset growth and dividend payout are critical and significant factors in influencing their idiosyncratic risks. Acquiring more assets can increase S-REITs’ idiosyncratic risks while issuing higher dividend payout can strategically reduce them. On the contrary, other financial characteristics such as leverage, return on equity and capitalisation are statistically insignificant, though economically imperative in relation to its idiosyncratic risks. The study of Singapore REITs in the Retail, Logistics and Diversified sectors is vital in understanding their characteristics during the new era and how individual financial variables affect their firm-specific risks. It offers fresh insights to the Monetary Authority of Singapore to fine-tune the regulations and nudges REIT managers to leverage on their financial ratios to cope better with their firm-specific risks.