Analysing the influence that macroeconomic factors have on the returns of South African real estate investment trusts
Real estate investment trusts (REITs) have become a popular investment vehicle for investors seeking to gain exposure to the real estate market. The South African REIT regime came into effect on 1 May 2013 and since then, the South African REIT market has been characterised by notable return volatility. This raises the question as to whether changes in key macroeconomic factors influence South African REIT returns, and if so, to what extent do changes in macroeconomic factors have on the returns of South African REITs. Notably, limited empirical research has been conducted to analyse the impact that macroeconomic factors have on South African REIT returns. As such, the aim of this study is to analyse the influence that economic growth, inflation, interest rates, and the stock market have on the returns of South African REITs. Particularly, the overall South African REIT market as well as the prominent REIT property subtypes in South Africa including the retail, office, and industrial sectors are investigated. To estimate and evaluate the relationships between the stated macroeconomic factors and South African REIT returns, vector autoregression models and vector error correction models are employed. The results reveal that South African REIT returns are significantly positively associated with economic growth, inflation, and stock market returns whereas they are significantly negatively related to interest rates. However, changes in these macroeconomic factors only explain a small percentage of the variability in REIT returns. Importantly, the findings of this study are consistent with what has been observed in other global REIT markets except for inflation in which a negative association has generally been reported. The results of this study strengthens the field of REIT research by adding to the existing body of knowledge of what is currently known about South African REITs. From a practical standpoint, this additional insight may assist REIT asset managers, real estate collective investment scheme fund managers, and investors with portfolio construction and risk management decisions.
A research report submitted in partial fulfilment of the Degree of Master of Commerce in Finance to the Faculty of Commerce, Law and Management, School of Economics and Finance, University of the Witwatersrand, Johannesburg, 2022