Critical Review - the Role of Malaysian Securitised Real Estate in Mixed-Asset Portfolio

CRITICAL REVIEW

This paper is written to critically view the research paper titled The Role of Malaysian Securitised Real Estate in Mixed-Asset Portfolio authored by Chyi Lin Lee (2009) and Kien Hwa (2009) Ting. There are 2 objectives in the study conducted i.e. to investigate if returns can be enhanced by including real estate securities in a portfolio and secondly to determine if real estate securities will be able to reduce the risk of the portfolio.  

The study has been conducted by studying a data with a sample size of 192 data by taking the monthly return of the FBMKLCI, Malaysian Government Securities Index and REIT Index between the years 1991 to 2006. However, this study has normality issues as the returns of the REITS do not display a symmetrical tail distribution. The methodology used for optimal portfolio allocation is the quadratic programming function and in order to study the impact of REITS in a portfolio, mean variance measures and downside risk optimisations were used. In a similar study conducted by Jarl G. Kallberg (2003), with a data size being 30 used the mixed zero-one non linear programme to allocate weightings for the Real Estate stocks in a portfolio. It is still uncertain as to which portfolio optimisation is better, as it requires an in depth study by itself. Kallberg’s study showed that there is a size effect issue, which says that the larger the value of real estate stocks in portfolio, the diversification benefits become smaller due to high correlation with other financial assets.

The study concludes that; an equally weighted REIT (Real Estate Investment Trust) portfolio displays reduced risk and better returns. A similar study by Rohaya (2015) concludes that allocating from 49.44% to 41.54% of weightage to REIT stocks in a portfolio will enhance return during unfavourable economic situations. Both these studies incorporated only Malaysian REITS. Another study conducted by Liow Kim Hong (2008) incorporating REITS form various Asian countries displayed that having Asian REITS in a portfolio gives a European or US investors great diversifications as the correlation between Asia property market and other financial assets in Western countries are low.

 While researching similar studies form 3 different authors, it can be noticed that the conclusion of the studies are not the same, although the area of research are almost the same. There are several factors contributing to this. The factors are sample size of REITS data, the time period of which the data has been taken as in 1997, Malaysia experienced an economic downturn, type REITS chosen and different portfolio optimisation techniques used. Hence in order to conduct a study to determine if REITS can play role in portfolio diversification and return enhancement with consistent and accurate results, the sample size should be big to avoid normality issues, standardise or specify the type of RIETS chosen, i.e. picking REITS which are only focused on mall and retail outlets and adjusting and using only one method/algorithm of performing portfolio optimising.