Performance Analysis of a Philippine REIT and Its Optimal Allocation in a Mixed-asset Portfolio

Abstract

Real estate investment trusts (REIT) are new and potentially lucrative investment vehicles in the Philippines with their inherent risks and rewards. Understanding their behavior and characteristics allows investors to maximize their profits and mitigate their risks. This study specifically considers the Ayala REIT (AREIT) and aims to conduct a performance analysis on it. The study used daily closing quotes of AREIT, Philippine Stock Exchange index and sectoral indices, S&P Philippine bond index, and monthly Philippine treasury bill from August 2020–April 2021. By using established methods in the modern portfolio theory (MPT), the risk- adjusted returns of the AREIT were obtained and compared with those of other assets. Other descriptors, such as correlations that indicate diversification potential were also obtained. This research also extends beyond performance and comparative analyses by using the mean-variance framework to determine the efficient frontiers that highlight the opportunity set of portfolios with the best return for a given level of risk. As a final modification in our AREIT description, this study employed the utility theory to incorporate an investor’s risk appetite in determining the optimal allocation of AREIT. The results show that AREIT had high returns and low risk relative to the other assets considered, as well as low to negative correlations with these assets. Moreover, it was observed that optimal AREIT weight increased with risk-aversion. AREIT played a dual role in increasing yields and mitigating risks in the portfolios considered.