Influence of the corporate social responsibility factors and financial factors on REIT performance in Australia

Purpose – Corporate social responsibility (CSR) has taken on increased stature and importance in recent years, as property investors have given an increased priority to environmental, social and corporate governance issues in their property investment decision‐making. The purpose of this paper is to empirically examine the impact of CSR factors and financial factors on the performance of Real Estate Investment Trusts (REITs) in Australia (A‐REITs) and assess whether these three CSR factors are separately priced by A‐REIT investors in uniquely adding value to A‐REIT investment performance. Design/methodology/approach – Using CSR rating factors and financial factors for the 16 A‐REITs in the ASX200, cross‐sectional multi‐factor models are employed to identify the separate pricing of these CSR factors in A‐REIT performance over 2005‐2010. Findings – The empirical results show that the environmental, social and corporate governance dimensions of CSR are not currently separately priced by A‐REIT investors, with most of the A‐REIT performance accounted for by the financial factors. Amongst the three CSR dimensions, corporate governance is seen to be the most influential CSR factor on A‐REIT performance. Practical implications – This paper empirically determines that the CSR dimensions of environment, social and corporate governance are currently less influential than the financial factors of size, book‐to‐market value, gearing and beta in influencing A‐REIT performance. Given the increased role of CSR amongst A‐REITs, corporate governance is seen to have a more influential role in A‐REIT pricing than either environmental or social factors. This finding also has practical implications for CSR practices in other REIT markets internationally. Originality/value – This paper is the first published property research analysis on the separate role of CSR factors, compared to the traditional financial factors, in the performance of A‐REITs. Given the increased focus on CSR by property investors, this research enables empirically‐validated and practical property investment decisions by A‐REIT investors regarding the separate pricing of these CSR factors in A‐REIT performance.