Systematic Risk & A-REIT Debt Characteristics

The study examines the relationship between systematic risk of Australian Real Estate Investment Trusts (A-REITs) and their debt characteristics over the period 1995 to 2008, controlling for firm size, organizational structure, property type, and time varying patterns in beta estimates. Both levered (normal beta) and unlevered fiscal year beta estimates of A-REITs are regressed against the A-REIT characteristics. Financial leverage variables do not show any statistically significant relationship with levered betas. In contrast two of the financial leverage variables, short-term debt and total debt are significant in the unlevered beta regression model. The study shows that size of A-REIT and property types owned by the A-REITs are important determinants of systematic risk. However, property type dummy variables are not significant after adjusting the fiscal year betas for thin trading. I find a significant time varying pattern in fiscal year beta estimates which is captured by the annual dummy variables in the regressions. I also find that the regression residuals display substantial heteroscedasticity and therefore needed to adjust for this by using Weighted Least Squares (WLS) method. The variance model I use to derive weights for WLS is also of independent interest because total financial leverage is statistically significant in explaining squared least squares residuals in all levered beta regression models. The results of the study will assist investors in A-REITs to make better risk return trade off decisions and A-REIT managers to evaluate their strategic decisions