THE ADDED-VALUE ROLE OF INDUSTRIAL AND LOGISTICS REITs IN THE PACIFIC RIM REGION - UNSWorks

THE ADDED-VALUE ROLE OF INDUSTRIAL AND LOGISTICS
 REITs IN THE PACIFIC RIM REGION

 Yu-Cheng Lina, Chyi Lin Leea, Graeme Newellb
 a
 Faculty of Built Environment, University of New South Wales
 b
 School of Business, Western Sydney University

ABSTRACT

Purpose - As significant listed property investment vehicles, Industrial and Logistics REITs
(I&L REITs) have recently enhanced their property portfolios; often replacing the traditional
industrial properties with logistic properties to gain strategic exposure to recent e-commerce
trends. This paper aims to assess the investment performance of I&L REITs by assessing the
significance, risk-adjusted performance, and portfolio diversification benefits of I&L REITs in
the Pacific Rim region from July 2011 and December 2018. The strategic property investment
implications for I&L REITs are also identified.

Design/methodology/approach - Monthly total returns from July 2011 and December 2018
were used to analyse the risk-adjusted performance and portfolio diversification benefits for
I&L REITs in the US, Japan, Australia and Singapore. An asset allocation diagram was
employed to assess the strategic role of I&L REITs in a mixed-asset portfolio in each case.

Findings - I&L REITs generally possessed superior average annual returns compared with the
other sub-sector REITs, stocks and bonds in the US, Japan, Australia and Singapore between
July 2011 and December 2018, with desirable portfolio diversification benefits. Importantly, a
more significant role for I&L REITs was generally observed in the mixed-asset portfolio
compared to the other sub-sector REITs in each of these four markets across the broad portfolio
risk spectrum. This reflects I&L REITs delivering enhanced portfolio returns and offering
portfolio diversification benefits in a mixed-asset portfolio in the US, Japan, Australia and
Singapore.

Practical implications - Property investors, particularly Property Securities Funds (PSFs) and
income-oriented investors, should consider including I&L REITs in their mixed-asset
portfolios, as Pacific Rim-based I&L REITs provided an attractive REIT investment sub-sector,

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co-existing alongside the other sub-sector REITs and major asset classes in a mixed-asset
portfolio in a Pacific Rim context, as well as being a portfolio diversifier. These results confirm
the added-value and strategic role of I&L REITs in a mixed-asset portfolio, seeing I&L REITs
as an effective investment pathway for I&L property exposure in the Pacific Rim region.

Originality/value - This is the first study to assess the investment performance of I&L REITs
in the Pacific Rim region, evaluating their significance, risk-adjusted performance and portfolio
diversification benefits, and the role of I&L REITs in a mixed-asset portfolio in the US, Japan,
Australia and Singapore. More importantly, this research is the first paper to provide empirical
evidence on I&L REITs, which have often transformed their traditional industrial property
portfolios with increased levels of logistics property to gain exposure to recent e-commerce
trends. This research enables more informed and practical property investment decision-
making regarding I&L REITs and their added-value and strategic role in a mixed-asset
portfolio, as well as delivering effective I&L property exposure in the Pacific Rim region, with
the added benefits of liquidity, transparency and fiscal efficiency.

Keywords Pacific Rim, Industrial and logistics REITs, E-commerce, Risk-adjusted
performance, Portfolio diversification, Mixed-asset portfolio

Paper type Research paper

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INTRODUCTION

Industrial and Logistics REITs (I&L REITs) have become a significant listed property sector

in the international property investment space. The growth of I&L REITs can be largely

attributed to the growth in e-commerce and the evolution of omnichannel retail platforms

(Bohjalian, 2018; CBRE, 2018a; Knight Frank, 2018; World Bank, 2018; Chong, 2019a).

Global e-commerce sales have rapidly grown from US$ 1.5 trillion in 2015 to US$ 4.1 trillion

in 2020, an increase of 2.7 times (KPMG, 2018). It is forecast to grow by 23.4% in the Asia-

Pacific (US$ 4.2 T in 2022) over the next five years, as well as 32% in the US (US$ 0.6 T in

2022) over the same period (CBRE, 2018c).

The growth of e-commerce has enabled e-retailers to employ an omnichannel retail platform

strategy and a dynamic supply chain ecosystem with high digital technologies, including big

data analytics, Internet of Things (IoT), Artificial Intelligence (AI), Artificial Reality (AR) and

cloud computing (Knight Frank, 2018). These advances have seen consumers demand faster

and more frequent delivery, with the trend towards just in time (JIT) procedures (CBRE,

2018d). To satisfy the last-mile delivery for online shoppers, increasing I&L property space

demands (eg: third-party logistics (3PL), food & beverage, building supplies, consumer goods)

are expected (World Bank, 2018; Xu et al., 2019). Specifically, it was estimated that US$ 1

billion in e-commerce transactions requires 1.25 million square feet of additional I&L property

space demand in the US. The level of growth in the Asia-Pacific region is forecast to be even

higher (CBRE, 2018b). In addition to e-commerce, this strong I&L property demand has been

supported by offshore manufacturing (Mangan et al., 2008; McKinnon, 2009), shifting patterns

of global distribution (Cidell, 2011), an increasing cost of freight transport (Wagner, 2010;

Christopher, 2016), an intensive use of high digital technologies (Lasserre, 2004; Mathauer and
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Hofmann, 2019), moves towards more alternate property sectors for diversification (IPF, 2015;

UNGC, 2018), the growth of infrastructure as an asset class (Peng and Newell, 2007) and the

emergence of IT-related infrastructure (eg: data centres) (Marzuki and Newell, 2019).

To accommodate this increasing I&L property demand, logistics properties have taken on

increased levels in I&L REIT portfolios, replacing the traditional style of industrial properties

(Ascendas REIT, 2018). For example, Goodman has increased the logistics property exposure

in their property portfolio from 78% in 2007 to 94% in 2018, while it has downsized the

traditional industrial property allocation by 16% (Goodman, 2018). This sees I&L REITs as a

suitable property investment vehicle for international property investors seeking exposure to

I&L properties.

Strong growth of I&L REITs has been evident in the Pacific Rim region. The total assets of

I&L REITs in this region have increased from US$ 34.8 billion in July 2011 to US$ 124.5

billion in December 2018, an increase of 3.6 times over this period. Importantly, 4 of the top 5

I&L REITs are in the Pacific Rim region, with the Pacific Rim region constituting 89.0% of

the total global market capitalisation of I&L REITs (see Table I). Figure 1 shows the growth

of I&L REITs in the US (Panel A, US$ 79.0 B in 2018), Japan (Panel B, US$ 14.7 B), Australia

(Panel C, US$ 14.9 B) and Singapore (Panel D, US$ 15.9 B). They are all larger than UK I&L

REITs (US$ 14.6 B) by market capitalisation. Figure 2 shows that I&L REITs in Japan have

grown by 8.0 times since July 2011, followed by the US (3.9 times), Australia (2.7), the UK

(2.5) and Singapore (2.2). This see the rapid growth of Pacific Rim-based I&L REITs in a

global context.

 (Insert Table I and Figure 1 and 2)

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However, no comparable study has yet been devoted to the investment opportunity for I&L

REITs in the Pacific Rim region, while the opportunities for composite REITs have been

widely discussed (Ong et al., 2011; Lee and Lee, 2014; Newell, 2012; Ling et al., 2018; Liow

et al., 2019). Given the sectoral effect acknowledged by numerous studies (Benefield et al.,

2009; Yavas and Yildirim, 2011; Hoesli et al., 2015; Lin et al., 2019), few studies have focused

on the investment performance of sector-specific REITs (Newell and Peng, 2007; Newell and

Fisher, 2009; Lin et al., 2019). Importantly, no detailed assessment of I&L REITs has been

documented, notwithstanding the Pacific Rim-based I&L REIT market having grown

significantly in recent years. Also, only a few studies have examined the land value (Thompson

and Tsolacos, 2001), affordability (Tsolacos et al., 2005) and investment performance (Kim,

2003; Newell, 2007) of the traditional industrial properties in the UK and Australia.

Therefore, it is essential to provide an empirical analysis of the investment performance of I&L

REITs in the post-Global Financial Crisis (GFC) context. This is particularly important for all

classes of property investors, as Pacific Rim-based I&L REITs have provided an investment

opportunity for listed property investment exposure to I&L properties in the rapidly-expanding

Pacific Rim region, as well as capturing recent e-commerce trends. This study is the first

analysis to assess the investment performance of I&L REITs in the Pacific Rim region, via the

investment performance of I&L REITs in the US, Japan, Australia and Singapore from July

2011 to December 2018. It highlights the risk-return performance, portfolio diversification

benefits, and the role of I&L REITs in a mixed-asset portfolio, benchmarked against the other

sub-sector REITs and major asset classes in each of these four markets. This raises the research

question concerning Pacific Rim-based I&L REITs as the empirical focus of this research:

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RQ. What role do I&L REITs play in a mixed-asset portfolio compared with the other sub-

sector REITs and major asset classes in the Pacific Rim region?

By answering this research question, this study contributes to the literature in numerous ways.

Firstly, this is the first I&L REIT paper offering insights into the added-value performance for

I&L REITs in general and Pacific Rim-based I&L REITs in particular. The previous REIT

papers have primarily focused on the composite REIT markets, with relatively little attention

placed on individual REIT sub-sectors. Further, many I&L REITs have recently restructured

their portfolios by changing from the traditional industrial property structures to increased

levels of logistics property; to capture the strong I&L property demand from the flourishing

growth of e-commerce and omnichannel retail platforms after the GFC. Secondly, unlike the

previous sub-sector REIT literature which only assessed single REIT sub-sectors at an

individual country level, this study assesses I&L REITs in the US, Australia, Singapore and

Japan in order to assess the investment distinctions across these different countries. As such,

this study provides an empirical analysis of the investment performance for I&L REITs in these

four markets for the first time. This provides a fuller strategic understanding of the added-value

role of I&L REITs to international property investors. The findings are expected to enable

property investors, particularly Property Securities Funds (PSFs) (eg: Vanguard, Invesco, UBS.

LaSalle) and income-oriented investors, to make more informed and practical decision-making

regarding I&L REITs in the Pacific Rim region, having significant property investment

implications. This paper highlights I&L REITs as an effective I&L property investment

opportunity in the Pacific Rim region, with the added benefits of liquidity, transparency and

fiscal efficiency.

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LITERATURE REVIEW

The significance of REITs has attracted international scholar attention into REIT investment

strategies (Ooi and Liow, 2004; Ooi et al., 2006; Hoesli et al., 2008; Horrigan et al., 2009; Ong

et al., 2011; Yavas and Yildrim, 2011; Newell et al., 2015; Sing et al., 2015; Lee et al., 2018).

REITs have been expected to reflect the investment performance of direct property in the

longer-term. Further, they have been validated as a substitute for direct property in the mixed-

asset portfolio, with greater liquidity, higher transparency, substantial and stable dividend

yields, lower transaction costs, lesser performance and cost management structures, and strong

portfolio diversification benefits, as well as seeing the existence of the public markets for

property securities (Ooi et al., 2006; Horrigan et al., 2009; Lee and Ting, 2009; Ong et al.,

2011; Lee et al., 2014; Newell et al., 2015; Sing et al., 2015). Moreover, the systematic and

unsystematic risk (Ooi and Liow, 2004; Liow, 2007), inflation hedging effectiveness (Hoesli

et al., 2008; Lee and Lee, 2014) and volatility spillover effects (Hoesli and Reka, 2013; Liow

and Ye, 2014; Lee et al., 2018) of composite REITs have been widely discussed in recent years.

Whilst composite REITs have attracted major property investor interest, few studies have

focused on single REIT sub-sectors. This is despite the fact that numerous studies have

acknowledged the existence of the sectoral effect in which different property sectors feature

different property cycles (Benefield et al., 2009; Yavas and Yildirim, 2011; Hoesli et al., 2015;

Lin et al., 2019). Several studies have examined office REITs (Bohjalian, 2018), retail REITs

(Newell and Peng, 2007), residential REITs (Newell and Fisher, 2009; Lin et al., 2019), storage

REITs (Bohjalian, 2018), lodging REITs (Jackson, 2009) and alternate REIT sectors (Peng and

Newell, 2007; Marzuki and Newell, 2019). However, no comparable study has been devoted

to I&L REITs in an international context, notwithstanding the recent rapid growth of Pacific
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Rim-based I&L REITs, and the strong I&L property demand facilitated by e-commerce (Xu et

al., 2019), offshore manufacturing (McKinnon, 2009), shifting global distribution patterns

(Cidell, 2011), increasing freight transport costs (Christopher, 2016), more intensive high

digital technology use (Mathauer and Hofmann, 2019), moves towards the alternate property

sectors for diversification (UNGC, 2018), the growth of infrastructure as an asset class (Peng

and Newell, 2007) and the emergence of IT-related infrastructure (Marzuki and Newell, 2019).

Hence, it is crucial to assess empirical evidence on the strategic issues regarding the investment

performance of Pacific Rim-based I&L REITs for effective I&L property investment exposure.

Unlike previous sub-sector REIT studies which were largely focused on individual countries,

this study assesses I&L REITs in the US, Australia, Singapore and Japan. By examining the

investment distinctions amongst these countries, this Pacific Rim study provides an empirical

analysis of the investment performance for I&L REITs in these four markets. This offers a

fuller understanding of the added-value role of I&L REITs to property investors in a Pacific

Rim and global context; particularly as investors seek greater control over their property

portfolio diversification strategies via sector-specific property plays.

SIGNIFICANCE OF INDUSTRIAL AND LOGISTICS REITs

Industrial and logistics REITs context

According to the Global Industry Classification Standard (GICS), I&L REITs own and manage

a portfolio comprising industrial facilities, warehouses and distribution centres (NAREIT,

2018a). As the growth in e-commerce and omnichannel retail platforms have been the primary

forces of I&L property demand (Xu et al., 2019), I&L properties have various formats to meet

the requirements of the last-mile delivery, lower transportation costs, greater retailer scale and
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easy access to skilled labour. This includes multi-storey, warehouses, pick-up lockers, infill

service centres, cold chain facilities (CBRE, 2018a). I&L properties also provide a network of

services supporting the physical movement of goods and commerce for both across borders

and within borders (World Bank, 2018).

Industrial and logistics REITs players

Pacific Rim-based I&L REITs have an active involvement by leading property fund managers,

with Table II presenting the profiles of the leading I&L REITs in the Pacific Rim region. These

include ProLogis (#1 in the Pacific Rim region; US; US$ 37,964 M; 612 properties), Goodman

(#2; Australia; US$ 13,574 M; 270), Duke Realty (#3; US; US$ 9,333 M; 473), Ascendas REIT

(#5; Singapore; US$ 5,865 M; 5), Nippon ProLogis REIT (#6; Japan; US$ 4,620 M; 42) and

GLP J-REIT (#8; Japan; US$ 3,910 M; 75).

 (Please insert Table II here)

This indicates that I&L REITs are professionally managed by a range of high quality I&L

property-specific fund managers in the Pacific Rim region. With 33 REITs and 4,363 I&L

properties, these four leading global I&L REIT markets offer a large supply of institutional-

grade I&L properties in the Pacific Rim region with liquidity benefits; to meet the strong I&L

property investment demand from a wide range of property investors at a Pacific Rim and

global level.

Industrial and logistics REITs investment perspective

I&L REITs in the Pacific Rim region have been active in recent years, with several large

portfolio acquisitions providing strong evidence of an active role of Pacific Rim-based I&L
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REITs. For example, ProLogis, the largest I&L REIT in the Pacific Rim region, plans to

increase its Japan logistics property portfolio by 10% of assets under management, with a

market value of US$ 9 billion (RCA, 2018). It also acquired 376 I&L properties from DCT

Industrial in August 2018, with the transaction value of US$ 8.4 billion (RCA, 2018). Besides,

Ascendas REIT has broadened the logistics property component in their portfolio from 60% in

2007 to 80% in 2018 (Ascendas REIT, 2018).

With the consistent income and attractive dividends, Pacific Rim-based I&L REITs have

attracted a high level of cross-border investors seeking an income-focused investment product

(CBRE, 2018a; World Bank, 2018). ESR REIT backed by Warburg Pincus and AXA

purchased 6 I&L properties in Japan, with a market value of US$ 1.0 billion. It also plans to

incorporate I&L properties in Denver within its portfolio, accounting for US$ 300 million

funded by Ping An (Chong, 2019a). There are several other major REITs in the Pacific Rim

region with a significant I&L property component in their portfolios, such as Dexus backed by

Government of Singapore Investment (GIC) adding an I&L property component with a market

value of US$ 2.0 billion (Chong, 2019a). This reflects a high level of portfolio investment

sophistication for Pacific Rim-based I&L REIT investors and the strong I&L property

investment demand reflecting a positive outlook for I&L REITs in the Pacific Rim region.

All of the abovementioned details concerning the significance of I&L REITs in the Pacific Rim

region highlight Pacific Rim-based I&L REITs as highly attractive listed property investment

vehicles with quality portfolios for major property investors at a Pacific Rim and global level.

The investment performance of I&L REITs benchmarked against the other sub-sector REITs,

stocks and bonds in the US, Japan, Australia and Singapore will be evaluated in the following

sections.
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METHODOLOGIES

Data sources

To assess the risk-return profiles of I&L REITs benchmarked against the other sub-sector

REITs, stocks and bonds in the Pacific Rim region, this study employs the S&P Industrial REIT

indices assessing the total return performance of I&L REITs in Japan, Australia and Singapore.

The I&L US-REIT index used was sourced from the FTSE/NAREIT/EPRA Industrial US

REIT total return series. Monthly total returns were estimated from July 2011 to December

2018 for I&L REITs and the other sub-sector REITs in the US, Japan, Australia and Singapore,

as the S&P sub-sector REIT indices were only available between July 2011 and December

2018. However, residential A-REITs were not included in the context of Australia, since the

availability of the S&P Residential A-REIT index only started in October 2013. This shortens

the analysis timeframe of this study. Direct property is not involved in this study, as it is not

available monthly in each of the four markets (eg MSCI). For a comparison with the major

asset classes in these four markets, Table III describes the data series used for the analysis.

 (Please insert Table III here)

Statistical analysis

The methodology part involves two stages. Firstly, the risk-return profiles of I&L REITs are

assessed with a standard performance analysis via the Sharpe ratio. The diversification benefits

of I&L REITs are measured by the correlation coefficient analysis. In the second stage, a

portfolio analysis is conducted to examine the role of I&L REITs in a mixed-asset portfolio. A

constrained portfolio analysis is employed in a mean-variance framework.

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Performance analysis

To examine the risk-return profile of I&L REITs, annualised monthly returns, risk and risk-

adjusted returns via the Sharpe ratio for sub-sector REITs, stocks and bonds in the US, Japan,

Australia and Singapore were estimated from July 2011 to December 2018. Mixed-asset

portfolio diversification benefits between one asset class and the others were evaluated by

utilising the correlation coefficient analysis.

Portfolio analysis

In this study, the mean-variance optimisation was used to assess the role of I&L REITs in a

mixed-asset portfolio in the US, Japan, Australia and Singapore. In the mean-variance

framework, the optimisation of the asset portfolio can be assessed as a quadratic programming

function as follows:

 2 = � � 
 =1 =1

where:

 2 = the variance of portfolio;

 = the proportion of portfolio allocated to asset ;

 = the proportion of portfolio allocated to asset ;

 = the covariance between asset returns and asset returns.

Further, following Lin et al. (2019), Lin et al. (2019) and Marzuki and Newell (2019), a

constrained portfolio analysis was used to constrain the REIT allocation at a maximum level

of 20% in the mixed-asset portfolio. This reflects the typical actual total property allocation in

institutional investor portfolios. Allocations in stocks and bonds were not constrained, in order
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to match the typical actual allocations to the major asset classes in institutional investor

portfolios. Asset allocation diagrams provided the empirical analysis regarding the added-value

and strategic role of I&L REITs in a mixed-asset portfolio in US, Japan, Australia and

Singapore.

INDUSTRIAL AND LOGISTICS REITs PERFORMANCE ANALYSIS

Risk-adjusted returns

Table IV presents the average annual returns, annual risk and the risk-adjusted performance for

I&L REITs in the US (Panel A), Japan (Panel B), Australia (Panel C) and Singapore (Panel D)

from July 2011 to December 2018.

I&L REITs delivered a competitive risk-adjusted performance in each of the four markets.

Specifically, I&L REITs in the US (average annual return: 11.74%; average annual return

ranking in its corresponding investment context: #1), Australia (20.18%; #1) and Singapore

(9.56%; #1) delivered the highest average annual returns amongst sub-sector REITs in their

respective markets over the last eight years. However, I&L J-REITs (13.63%; #2) were slightly

exceeded by specialty J-REITs (16.99%; #1). Importantly, I&L REITs out-performed both

stocks and bonds in each of the four markets over the entire study period.

The risk level for I&L REITs in the US (annual risk: 20.33%; annual risk level ranking in its

corresponding investment context: #7) and Australia (15.55%; #6) were higher than the other

sub-sector REITs and major asset classes in each of these two markets. However, the risk level

for I&L REITs in Japan (15.28%; #2) and Singapore (11.69%; #2) were lower than the other

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sub-sector REITs (see Table IV) and stocks (Japan: 16.77%; Singapore: 12.31%) in each of

these two markets.

On a risk-adjusted performance basis (via the Shape ratio), I&L REITs in Japan (0.88; the

Sharpe ratio ranking in its corresponding investment context: #2) and Singapore (0.75; #2)

were amongst the top two best-performing assets in each of these two markets, since they

delivered high annual returns but a lower risk level than the other sub-sector REITs and major

asset classes in each of the two investment contexts. Specifically, I&L J-REITs slightly

underperformed specialty J-REITs (1.08), while I&L S-REITs were only surpassed by

Singapore bonds (0.96). However, I&L REITs in the US (0.55; #3) and Australia (1.12; #3)

were ranked as the third-best performer in their respective investment contexts. In particular,

I&L US-REITs were out-performed by US stocks (0.93) and specialty US-REITs (0.57), and

I&L A-REITs were out-performed by specialty A-REITs (1.62) and office A-REITs (1.14).

 (Please insert Table IV here)

In summary, the empirical analysis found that I&L REITs delivered higher average annual

returns than many of the other sub-sector REITs and major asset classes in the US, Australia

and Singapore. The higher risk level of I&L REITs saw them fail to emerge as the best

performer on a risk-adjusted performance basis in three of the investment contexts, except for

I&L REITs in Singapore. I&L J-REITs marginally underperformed specialty J-REITs, but

outperformed the other sub-sector REITs and major asset classes in Japan.

The substantial investment performance of Pacific Rim-based I&L REITs was supported by

the solid I&L property market fundamentals in the Pacific Rim region (CBRE, 2018d; Knight

Frank, 2018). I&L US-REITs contributed stronger annual returns than the other sub-sector
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REITs and US bonds, whilst it was lesser performed than specialty US-REITs and US stocks

on a risk-adjusted performance basis due to its higher risk level. This can be explained by the

ongoing US-China trade conflict since it has slowed consumer spending in the US and

increased the risk level for the I&L US-REIT market (Bohjalian, 2018; Chong, 2019b). The

risk-adjusted return results have also been conducted using downside risk. Numerous studies

acknowledge downside risk as a superior risk measure (Sing and Ong, 2000; Ang et al., 2006;

Lee et al., 2008). The downside risk results are consistent with the baseline results.

Overall, this analysis generally validates the strong investment performance for I&L REITs

compared with the other sub-sector REITs, stocks and bonds in the US, Japan, Australia and

Singapore between July 2011 and December 2018.

Portfolio diversification benefits

Table V presents the inter-asset correlation matrix for I&L REITs, the other sub-sector REITs,

stocks and bonds in the US (Panel A), Japan (Panel B), Australia (Panel C) and Singapore

(Panel D) from July 2011 to December 2018.

Monthly returns for I&L REITs in all four markets exhibited significant and positive

correlations with stocks. Compared with the other sub-sector REITs in each of the four markets,

I&L J-REITs (r=0.38) delivered higher diversification benefits with Japan stocks than those

contributed by the other sub-sector J-REITs (average r=0.43). I&L S-REITs (r=0.62) broadly

outperformed the other sub-sector S-REITs (average r=0.68), except for residential S-REITs

(r=0.59). Lesser portfolio diversification benefits with stocks for I&L REITs were found in the

US and Australia respectively. Specifically, I&L US-REITs (r=0.66) presented the least

portfolio diversification benefits with US stocks amongst the sub-sector US-REITs (average
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r=0.55). Additionally, I&L A-REITs (r=0.62) only delivered greater portfolio diversification

benefits with stocks than office A-REITs (r=0.67), whereas it delivered lesser portfolio

diversification benefits than the other sub-sector A-REITs (average r=0.45).

The desirable portfolio diversification benefits with bonds for I&L REITs were evident in the

US (r=-0.01), Japan (r=0.16), Australia (r=-0.11) and Singapore (r=-0.33) respectively, as their

monthly returns were weakly correlated with bonds. I&L REITs in Australia and Singapore

showed superior portfolio diversification benefits with bonds than the other sub-sector REITs

in each of these cases. I&L US-REITs generally delivered stronger portfolio diversification

benefits with US bonds than those delivered by the other sub-sector US-REITs (average

r=0.05), except for residential US-REITs (r=-0.06). Across the four countries, the least

portfolio diversification benefits with bonds was evident with Japan bonds for I&L J-REITs. It

was superior to specialty J-REITs (r=0.17), but was inferior to the other sub-sector J-REITs

(average r=0.12).

In the context of an inter-REIT sector investment strategy, I&L REITs presented positive and

significant correlations with the other sub-sector REITs in each of the four countries. I&L A-

REITs (average r=0.53) showed some portfolio diversification benefits with the other sub-

sector A-REITs. However, I&L REITs in Singapore (average r=0.71), the US (average r=0.78)

and Japan (average r=0.78) delivered lesser portfolio diversification benefits with the other

sub-sector REITs in their respective investment contexts.

 (Please insert Table V here)

Overall, the portfolio diversification benefits with stocks and bonds delivered by I&L REITs

in the US, Japan, Australia and Singapore all showed some degree of diversification benefits
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for international property investors seeking portfolio diversification in these regions. This is

consistent with the findings of Bohjalian (2018) in which the composite REITs in the Pacific

Rim region have a historically low correlation with stocks over the last 16 years. This section

has highlighted portfolio diversification benefits with both stocks and bonds for I&L REITs in

the Pacific Rim region.

Constrained portfolio analysis for I&L REITs from July 2011 to December 2018

The strong investment performance for I&L REITs implies that I&L REITs could play a

significant role in a mixed-asset portfolio across these four markets. Figure 3 illustrates the

portfolio compositions of I&L REITs in the constrained mixed-asset portfolios in the US, Japan,

Australia and Singapore over July 2011 and December 2018.

To avoid the over-exposure of REITs in a mixed-asset portfolio, this study used an upper-

bound constraint of 20% for sub-sector REITs in each of the investment contexts. This reflects

the typical practical total property asset allocation in institutional investor portfolios. Also,

allocations in both stocks and bonds were not constrained. All of these constraints reflect the

typical actual allocation to the major asset classes in institutional investor portfolios.

In the US investment context (Panel A), I&L US-REITs (an average allocation=1.8%) was

evident across the upper half of the portfolio risk spectrum over the study period. The higher

risk-adjusted returns of I&L US-REITs saw it co-existing with residential US-REITs (9.1%),

bonds (35.2%) and stocks (53.9%). It diminished residential US-REITs at the end of the risk

spectrum; gradually exceeded by stocks at the higher risk levels. There was no role for office,

retail and specialty US-REITs across the full risk spectrum over the full time period. This

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shows I&L US-REITs as an effective REIT sub-sector for investors seeking listed I&L property

exposure in the US. However, residential US-REITs played a stronger role than I&L US-REITs.

In the Japan mixed-asset portfolio (Panel B), I&L J-REITs accounted for a maximum level at

2.8% of the capped total property exposure in the mixed-asset portfolio. I&L J-REITs (an

average allocation=0.4%) were positioned in the lower half of the risk spectrum; complemented

by specialty J-REITs (17.3%), stocks (37.1%) and bonds (45.2%) as the risk level increased.

There was no role for office, retail and residential J-REITs across the entire risk spectrum over

the study period. Compared with the other sub-sector J-REITs, I&L J-REITs are an added-

value asset for investors with conservative to moderate risk requirements, since I&L J-REITs

entered in the lower half of the risk spectrum. It should be noted that specialty J-REITs played

a more prominent role than I&L J-REITs in the constrained mixed-asset portfolio.

In the Australian mixed-asset investment context (Panel C), I&L A-REITs were evident in the

constrained portfolio compositions over the last eight years. I&L A-REITs (an average

allocation=3.1%) were embedded at both ends of the risk spectrum. It was exceeded by

specialty A-REITs (15.5%), bonds (32.3%) and stocks (49.1%) as the risk level increased in

the lower half of the risk spectrum. Nevertheless, it took over the role of specialty A-REITs

and bonds at the higher end of the risk spectrum, along with stocks in the upper half of the risk

spectrum. For the other sub-sector A-REITs, office and retail A-REITs found no role in the

constrained portfolio compositions over the entire study period. Given that an investor’s risk

is a key determinant of the mixed-asset allocation, I&L A-REITs were seen as an appropriate

form of sub-sector A-REITs for investors, as its presence was evident at both ends of the risk

spectrum. This also indicates that I&L A-REITs were an added-value REIT sub-sector in the

 18

mixed-asset portfolio. Nonetheless, specialty A-REITs was a more significant role in the

Australian portfolio allocations compared with I&L A-REITs.

In the Singapore context (Panel D), compared to I&L REITs in the US, Japan and Australia,

I&L S-REITs (an average allocation=18.5%) strongly dominated towards the upper level of

20% of the total property allocation across most of the portfolio risk spectrum over the full

time period. The other sub-sector S-REITs played no role in the constrained portfolio

compositions. Due to the constrained allocations for the property asset classes, stocks (38.2%)

and bonds (43.1%) had a stronger role in shaping the constrained mixed-asset portfolio. This

substantiates that I&L S-REITs were the most evident sub-sector REITs in the Singapore

investment context over the timeframe.

The differential portfolio allocations for I&L REITs in each of the four markets can be

explained by their risk-adjusted performance and correlations with the other sub-sector REITs

and major asset classes in each of the four markets. In the US and Australian contexts, I&L

REITs offered the highest annual returns and the highest risk level amongst all assets in the

respective markets. Further, residential US-REITs (r=0.71) and US stocks (r=0.66) had strong

correlations with I&L US-REITs. Similarly, I&L A-REITs were strongly correlated with

specialty A-REITs (r=0.72) and Australian stocks (r=0.62). This resulted in portfolio

compositions of I&L REITs in the US and Australia being replaced by residential US-REITs

and specialty A-REITs respectively, as well as stocks in their respective markets as the risk

level increased. As such, it is reasonable to expect that I&L REITs only featured in the upper

half of the risk spectrum in the US and Australia as a higher risk investment for investors.

 19

In the Japan context, I&L J-REITs were ranked as the second-best risk-adjusted performer

amongst all assets. They offered comparably lower annual returns than specialty J-REITs.

Hence, the risk-adjusted performance by I&L J-REITs was slightly inferior to specialty J-

REITs. Also, I&L J-REIT monthly returns were strongly correlated with specialty J-REITs

(r=0.69). These factors cause the lesser portfolio contributions for I&L J-REITs in the

constrained portfolio allocations since it was primarily complemented by specialty J-REITs. In

addition, unlike I&L REITs in the US, Japan and Australia, I&L S-REITs dominated the

Singapore investment context. This can be explained by the strong performance of I&L REITs

in Singapore, offering the highest annual returns and comparatively low risk levels amongst all

assets. It was ranked as the best risk-adjusted performing sub-sector REIT market in the

Singapore mixed-asset portfolios over the study period. The strong performance of I&L S-

REITs can be attributed to Singapore being one of the major international logistics hubs, with

the growth of trade in commercial services at an average annual rate of 6.3% over the study

period (WTO, 2019).

 (Please insert Figure 3 here)

While stocks and bonds had a strong role in the constrained portfolio compositions, a greater

role of I&L REITs in the constrained portfolio allocations compared with the other sub-sector

REITs in the US, Japan, Australia and Singapore was evident. Importantly, these empirical

analyses confirm the added-value role of I&L REITs in a mixed-asset portfolio in each of the

four markets over the last eight years, particularly for I&L S-REITs. It also reflects the strong

property investor appetite for Pacific Rim-based I&L REITs (CBRE, 2018d; Chong, 2019a).

Furthermore, the differential portfolio allocations for I&L REITs in each of the four markets

explained the investment distinctions amongst these four major REIT markets.
 20

Robustness checks

Several robustness checks were undertaken. Firstly, to offer a fuller understanding of I&L

REITs, a portfolio optimisation by considering Pacific Rim-based REITs only with a constraint

of 5% cash in each of the four markets. This allows us to gauge the role of I&L REITs in

comparison with the other sub-sector REITs without the influence of the major asset classes.

The results are fairly consistent with the baseline results in which Pacific Rim-based I&L

REITs played a stronger role than the other sub-sector REITs in the mixed-asset portfolios. In

other words, the baseline results are robust.

Secondly, a downside risk analysis was employed as an alternative risk measure, particularly

given numerous studies acknowledged downside risk as a superior risk measure (Sing and Ong,

2000; Ang et al., 2006; Lee et al., 2008), and it is more consistent with how investors,

particularly property investors, individually perceive risk (Lee et al., 2008). Hence, this study

re-ran the analysis in a downside risk framework. The results reinforced the baseline results in

which the added-value role for Pacific Rim-based I&L REITs in a mixed-asset portfolio was

evident. In particular, a stronger role for I&L REITs was evident in the mixed-asset portfolios

in the US and Japan compared with a mean-variance framework. Overall, the use of alternative

risk measure (eg: downside risk) did not alter the conclusions of this study.

Lastly, one could make a case that a fund, particularly PSFs, might have a mandate to gain

exposure to e-commerce trends in the regions, whilst international property investors would

not build country-specific portfolios from a practical point of view. Therefore, a regional-based

REIT portfolio was constructed. Again, the results showed that the regional-based I&L REITs

 21

played a stronger role in the mixed-asset portfolio, strengthening the baseline results regarding

the added-value and strategic role of Pacific Rim-based I&L REITs in the mixed-asset portfolio.

PROPERTY INVESTMENT IMPLICATIONS FOR INDUSTRIAL AND LOGISTICS
REITs

I&L REITs are an important REIT sub-sector for both local and international property investors

seeking international listed property investment exposure; particularly with the strong growth

of Pacific Rim-based I&L REITs that has recently been seen. Nonetheless, no comparable

study has yet been devoted to I&L REITs. This study aimed to empirically validate the

investment performance, portfolio diversification benefits, and the role in a mixed-asset

portfolio for I&L REITs, in delivering effective I&L property investment exposure in the

Pacific Rim region.

Several key findings are identified. Firstly, superior average annual returns were generally

observed when I&L REITs were compared with the other sub-sector REITs, stocks and bonds

in the US, Japan, Australia and Singapore over July 2011 to December 2018. I&L REITs

offered higher portfolio returns and generally delivered greater portfolio diversification

benefits with both stocks and bonds than the other sub-sector REITs in each of the four markets

over the last eight years. This confirms the added-value role of Pacific Rim-based I&L REITs

in the mixed-asset portfolios in these four markets, with strong portfolio diversification benefits

for international property investors seeking portfolio diversification in the Pacific Rim region.

Secondly, a comparative finding of I&L REITs in these four different markets in the Pacific

Rim region suggests that the investment distinctions amongst these four major REIT markets.

This also highlights the importance of a detailed analysis for each REIT market in providing a

fuller understanding of I&L REITs.

 22

The findings have several significant listed property investment implications. Property

investors are advised to consider including Pacific Rim-based I&L REITs within their mixed-

asset portfolios, given the strong investment performance of I&L REITs in the Pacific Rim

region. REIT investment advisors should also consider recommending I&L REITs to their

clients who intend to develop a new REIT portfolio in the Pacific Rim region; capturing the

growth dynamics of the Pacific Rim and in logistics property demand. Furthermore, to gain

exposure to e-commerce trends in the Pacific Rim region, international property investors

should consider investing in Pacific Rim-based I&L REITs which have rotated the traditional

industrial property structures to logistics property formats in the post-GFC context.

However, property investors should acknowledge the differential I&L REIT portfolio

allocations in each of the four markets. This could be attributed to the different growth speed

of trade in commercial services in different markets. This highlights the significance of a

dedicated study of each market, and the importance of identifying the growth in commercial

services of the country to make an informed property portfolio investment decision.

Whilst I&L property investment via a non-listed vehicle is the mainstream route for large-scale

global institutional investors (CBRE, 2018d), Pacific Rim-based I&L REITs are empirically

validated as having an added-value and strategic role in the mixed-asset portfolios. This

validates Pacific Rim-based I&L REITs as an effective vehicle for I&L property investment

exposure in the Pacific Rim region, with the added benefits of liquidity, transparency and fiscal

efficiency.

 23

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 27

TABLES

 Table I. Significance of the major global I&L REIT markets: December 2018 (US$ B)
 Market cap
 Markets Composite REITs I&L REITsa % I&L REITs
 US 1,009.2 79.0 7.8
 Japan 111.7 14.7 13.2
 Australia 89.6 14.9 16.6
 UK 67.4 14.6 21.7
 Singapore 64.0 15.9 25.7

 No. of REITs
 Markets Composite REITs I&L REITsa % I&L REITs
 US 171 13 7.6
 Japan 60 8 13.3
 Australia 46 4 8.7
 UK 57 8 14.0
 Singapore 40 8 20.0
 Note: aCategorised by the GICS
 Source: Authors’ compilation from NAREIT (2018b) and Thomson Reuters Eikon

 28

Table II. Profiles of I&L REITs in the Pacific Rim region: December 2018
Rank I&L REITs Listing date Market cap No. of
 (US$ M) properties
Panel A: US
 1 ProLogis Nov. 1997 37,964.0 612
 2 Duke Realty Aug. 1988 9,332.6 473
 3 Liberty Property Trust Jun. 1994 6,336.8 594
 4 PS Business Parks Mar. 1991 4,535.5 102
 5 Americold Realty Trust Jan. 2018 3,742.0 129
 6 First Industrial Realty Trust Jun. 1994 3,703.2 496
 7 Eastgroup Properties Jan. 1973 3,278.2 295
 8 STAG Industrial Apr. 2011 2,811.0 342
 9 Rexford Industrial Realty Jul. 2013 2,793.9 151
 10 Terreno Realty Feb. 2010 2,079.8 123
 11 Industrial Logistics Properties Trust Jan. 2018 1,278.6 270
 12 Monmouth REIT Jan. 1973 1,124.7 109
 13 Plymouth Industrial REIT Jun. 2017 64.1 50
Panel B: Japan
 1 Nippon ProLogis REIT Feb. 2013 4,620.4 42
 2 GLP J-REIT Dec. 2012 3,909.8 75
 3 Japan Logistics May 2005 1,856.1 47
 4 Industrial & Infrastructure Fund Oct. 2007 1,762.1 67
 5 Lasalle Logiport REIT Feb. 2016 1,063.8 11
 6 Mitsui Fudosan Logistics Aug. 2016 742.5 16
 7 Mitsubishi Estate Logistics Sep. 2017 535.5 10
 8 CRE Logistics REIT Feb. 2018 209.6 7
Panel C: Australia
 1 Goodman Jun. 1987 13,574.2 270
 2 Centuria Industrial Dec. 2012 514.6 41
 3 Propertylink Group Aug. 2016 485.9 30
 4 APN Industria REIT Dec. 2013 313.0 17
Panel D: Singapore
 1 Ascendas REIT Nov. 2002 5,865.0 5
 2 Mapletree Logistics Trust Jul. 2005 3,657.7 93
 3 Frasers Logistics & Industrial Trust Jun. 2016 1,528.1 83
 4 ESR REIT Jul. 2006 1,186.2 57
 5 AMP Capital Industrial REIT Apr. 2007 670.5 25
 6 Cache Logistics Trust Apr. 2010 548.0 26
 7 Ec World REIT Jul. 2016 400.9 7
 8 Sabana Industrial REIT Nov. 2010 325.0 18
Source: Authors’ compilation from NAREIT (2018b) and various I&L REIT websites

 29

Table III. Data description of major asset classes in US, Japan, Australia and Singapore
Market Asset Data Series
US I&L REITs FTSE EPRA/NAREIT Industrial US REIT Index
 Stocks S&P 500 composite index
 Bonds US Treasury 10-year bond index
 Cash US 3-month Treasury bills
Japan I&L REITs S&P Industrial Japan REIT Index
 Stocks DJGL Japan
 Bonds Japan Government 10-year bond yield
 Cash Japan 3-month interbank rate
Australia I&L REITs S&P Industrial Australian REIT Index
 Stocks S&P/ASX 300
 Bonds Australian Commonwealth Government 10-year bond yield
 Cash Australian 3-months interbank rate
Singapore I&L REITs S&P Industrial Singapore REIT Index
 Stocks DJGL Singapore
 Bonds Singapore Government 10-year bond yield
 Cash Singapore 3-month interbank rate
Source: Authors’ construction

 30

Table IV. I&L REITs risk-adjusted return analysisa: July 2011-December 2018
Asset classes Average annual Annual Risk-adjusted Rankb
 return (%) risk (%) performance
Panel A: US
REITs
 Office 4.25 16.05 0.24 6
 Retail 6.47 16.94 0.35 5
 I&L 11.74 20.33 0.55 3
 Residential 9.15 15.75 0.55 4
 Specialty 8.89 14.69 0.57 2
Stocks 11.24 11.61 0.93 1
Bonds 0.78 3.13 0.10 7
Panel B: Japan
REITs
 Office 11.26 18.39 0.60 5
 Retail 10.63 15.98 0.65 4
 I&L 13.63 15.28 0.88 2
 Residential 12.66 16.17 0.77 3
 Specialty 16.99 15.58 1.08 1
Stocks 9.69 16.77 0.57 6
Bonds 0.42 1.28 0.19 7
Panel C: Australia
REITs
 Office 16.29 11.83 1.14 2
 Retail 11.17 13.04 0.64 4
 I&L 20.18 15.55 1.12 3
 Specialty 19.23 10.14 1.62 1
Stocks 7.30 11.54 0.39 5
Bonds 3.10 2.30 0.13 6
Panel D: Singapore
REITs
 Office 7.91 15.41 0.46 5
 Retail 7.75 12.44 0.56 3
 I&L 9.56 11.69 0.75 2
 Residential 6.35 11.70 0.48 4
 Specialty 4.99 12.01 0.35 6
Stocks 3.66 12.31 0.23 7
Bonds 2.10 1.38 0.96 1
Note: aLocal currency; bbased on the Sharpe ratio
Source: Authors’ compilation/analysis

 31