Exploring the spatialisation of the performance of residential REITs investment and direct investment in the housing market

ABSTRACT

Despite numerous studies about the housing sector, the connection between the performance of residential real estate investment trusts (REITs) investment and direct investment in the housing market is still under-researched. To help fill this gap, we used quarterly data of the Australian Securities Exchange (ASX) residential REITs index and direct housing returns of Australia and its major cities, spanning March 1983 to June 2021, and adopted a suite of econometric methods to document the following findings. First, publicly listed housing (residential REITs) and private housing markets are not separated, but both are closely related in terms of their investment performance. Second, the performance of direct investment in the housing market of Adelaide, Brisbane, Melbourne and Sydney could lead to positive investment performances for residential REITs over time, while no comparable evidence is found for Canberra, Darwin, Hobart and Perth. Third, further analyses revealed a one-way direction of performance, flowing from the housing market of Brisbane, Melbourne and Sydney to residential REITs, while no similar evidence of performance flow was found for Adelaide. Our study has provided new evidence that could contribute to the discussion on the expansion of residential properties in the portfolio of institutional investors.

KEYWORDS:

• Australia
• housing performance
• direct investment in housing
• residential REITs investment
• ARDL bounds test
• spatialisation

JEL:

• C22
• G31
• G12

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. According to the Australian Securities Exchange (ASX), Australia REITs, denoted as A-REITs, are ‘listed investment vehicles that provide exposure to property assets such as office towers, shopping malls, industrial buildings – even hotels and cinemas. Like managed funds, they are pooled investments overseen by a professional manager. And because they are listed on the ASX, you can buy and sell them through your broker, in the same way as shares’.

2. To check for any potential confounding effect, we run the ECM model by including the resident population as an explanatory variable for Melbourne and Sydney. The results showed that population is a key driver of direct investment in the housing market of Sydney in both the short-run and long-run but not for residential REITs investment. In the case of Melbourne, resident population is also a key determinant of direct investment in the housing market in the short-run but not in the long run. However, population is also an insignificant driver of residential REITs investment in Melbourne both in the short-run and long-run. These results show no confounding effects, and they are consistent with our earlier discussion on the relationship between the performance of residential REITs investment and direct investment in housing market. The results are not reported for brevity but they are available on request. We thank the reviewer for raising this point.