Offshore property investment and market performance of South African REITs: a regime-switching CAPM analysis

Purpose The purpose of this study is to determine whether South African real estate investment trusts (REITs) with significant foreign real estate holdings produce better market performance metrics when compared to REITs with larger domestic holdings. The paper also provides a comprehensive overview of the market performance of South African REITs in the decade following the inception of the REIT regime in 2013. Design/methodology/approach The authors employ the capital asset pricing model (CAPM), using different estimation techniques to determine the stability of the estimated parameters over time. In addition to the CAPM framework, several basic and advanced portfolio performance metrics are computed to assess the performance of the various REIT portfolios. Findings The results show that REITs with significant offshore allocations produce superior market returns than their counterparts. Across most of the risk measures analysed, the foreign-biased REIT portfolios were found to be riskier. On the whole, foreign-biased REITs performed better on a risk-adjusted basis. The results were consistent across the different sample periods and the performance metrics analysed. Practical implications The results suggest that the decision to diversify internationally has implications for the pricing of REITs on stock markets. The differences in the performance metrics for the foreign- and home-biased REIT portfolios also imply an opportunity for investors to further diversify REIT portfolios by holding a mix of home-biased and foreign-biased REITs. Originality/value This paper is one of the few to consider the implications of international diversification on stock market performance rather than on more fundamental measures of REIT performance such as the net present value. This study also provides an emerging market (African) perspective to the literature.