Real Estate Securities, Portfolio Construction and Down-side Risk Analysis
Securitized Real Estate Market In Malaysia:
The securitized real estate market in Malaysia is dominated by listed property companies and the REIT(Real Estate Investment Trusts). Since the real estate market is still emerging, the size of the securitized real estate market is small and most of the research findings on the securitized real estate market of Malaysia have indicated that the securitized real estate market is an ineffective investment and offers unfavorable return. Hence, considering the poor performance of the Malaysian securitized real estate market, Malaysian Government has taken several steps to improve the performance of the real estate market. Hence, in this report we will analyze the role of Malaysian Securitized Real Estate Market in a mixed-asset portfolio and also the downside risk associated with it through the research work conducted by Chy Cun Lee in his work- Securitized Real Estate in a Mixed-asset Portfolio: The Case of Malaysia
Data for the research:
The research work was conducted using monthly returns of Malaysian Shares and Bonds for the period of 15 years from January 1991 to December 2006, while the Securitized real estate is represented by the Property Sector Index and REITs of Bursa Malaysia.
Performance Evaluation:
The research results indicated the results that the portfolio performance was not affected well with the inclusion of property shares in a mixed-asset portfolio suggesting that inclusion of the property shares neither offered any diversification benefit nor any return enhancement to the mixed-asset portfolio. On the other hand, equally weighted REIT portfolio was shown to offer both return appreciation and diversification benefits to the mixed-asset portfolio. However, the results were different for equally weighted and value weighted REIT portfolios. This means that at the time of portfolio construction, the portfolio managers should be cautious relating to different risk and return profile of REIT’s.
Downside risk analysis:
The research work also included downside risk analysis where the author examined the normality of the assets included in the mixed-asset portfolio by using advanced normality tests. The final results concluded that , normality assumptions for all assets can be rejected at the 1% significance level by all of the normality tests except for the Kolmogorov-Smirnov test that could not reject the normality assumption for shares and property shares. The rejection attributes to the sensitivity of the test conducted. This concludes that, downside risk should be given the primary consideration in assessing the role of securitized real estate in the mixed-asset portfolio.
Works Cited
Lee, Chy Lin. "Securitised Real Estate in a Mixed-asset Portfolio: The Case of Malaysia." 19 Ocotber 2014 <http://www.prres.net/papers/Chyi_Securitised_Real_Estate_in_a_Mixed_asset_Portfolio.pdf>.
