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

Anthony J. De Francesco and Luke Hartigan ()

Journal of Property Investment & Finance, 2009, vol. 27, issue 6, 543-562

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.

Keywords: Property; Risk management; Real estate; Investments; Australia (search for similar items in EconPapers)
Date: 2009
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