Debt and Financial Performance of MREITs in Malaysia: An Optimal Debt Threshold Analysis

Zalina Zainudin (), Hafezali Iqbal Hussain (), Abdul Razak Abdul Hadi and Izani Ibrahim ()
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Zalina Zainudin: Universiti Kuala Lumpur Business School Level 8, Bangunan Yayasan Selangor No 74, Jln. Raja Muda Abdul Aziz, Kg. Baru MALAYSIA
Hafezali Iqbal Hussain: Universiti Kuala Lumpur Business School Level 8, Bangunan Yayasan Selangor No 74, Jln. Raja Muda Abdul Aziz, Kg. Baru MALAYSIA
Izani Ibrahim: Department of Finance College of Business Administration Prince Sultan University P.O.Box No. 66833 Riyadh 11586 SAUDI ARABIA

Jurnal Ekonomi Malaysia, 2017, vol. 51, issue 2, 63-74

Abstract: The aim of this study is to estimate the optimal debt threshold of Real Estate Investment Trusts in Malaysia (MREITs). This study uses continuous sequential threshold regression approach adopted from Bai and Perron (1998; 2003) and Perron (2006) methodologies and collaborates the threshold regression by Hansen (2001; 2015) to estimate the MREITs optimal debt threshold. In this regard, although by regulation, MREITs are allowed to use debt up to 50% of their total assets, the result of this study indicates that MREITs need to maintain a debt level of between 14.33% and 21.40%, to balance the external funding needs and the optimal level of financial performance. Given the high dividend payout requirement, and the marginal tax rate of zero, if debt is chosen as the dominant approach of obtaining external financing needs, MREITs need to carefully monitor the optimal level of debt in order to maximize the shareholders return and to avoid debt overhang problem. The finding offers a useful guide to MREITs managers in strategizing their financing decision to support their external growth needs by investing in real property.

Keywords: Malaysia; Real Estate Investment Trusts; financial performance; optimal debt; threshold (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ukm:jlekon:v:51:y:2017:i:2:p:63-74

DOI: 10.17576/JEM-2017-5001-6

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