The Wealth Effects of Property Acquisitions: Evidence from Japanese and Singaporean REITs

Abstract

This article examines the wealth effects of 228 property acquisition announcements made by REITs publicly traded in Singapore and Japan, which are the two largest REIT markets in Asia. Adopting an aggressive growth-byacquisition strategy, the newly listed REITs acquired a number of properties within a short time period. Despite their regular activities, we observe the acquisition announcements are associated with a significantly positive abnormal increase in shareholder wealth averaging 0.38% in a 5-day window around the event date. Controlling for the method of payment, buyer's acquisition strategy and seller's relationship with the acquiring REIT, the regression results show that the likely sources of economic gains associated with acquisitions are economies of scale and better management by acquiring firms. We also find strong evidence that the market reacts less favorably to acquisitions involving a portfolio of properties as opposed to a single property and weaker evidence that it reacts less favorably to mixed-use acquisitions. These findings suggest the presence of premiums on transparency and corporate focus.Although merger and acquisition (M&A) decisions consume massive corporate resources and expose shareholders to high uncertainty, they are one of the quickest ways for a firm to grow. Within the corporate finance literature, a number of theories have been advanced to explain why M&As take place. From the shareholders' perspective, the main concern is whether the acquisitions create or destroy value. To the extent that managers adopt shareholder wealth maximization as the goal of corporate investment decisions, new acquisitions should be expected to produce a rate of return that at least equals their cost of capital. In this context, the net present value (NPV) is the best criteria for evaluating new ventures. If an acquisition is a positive NPV venture and to the extent that the positive NPV represents economic gains to the shareholders, one should expect to see an increase in the stock price of the acquiring firm.

Seasoned Equity Issuance by Japan and Singapore REITs

“…These differences motivate us to conduct sub-sample analysis by country. For further institutional details on the REIT markets in Japan and Singapore, please refer to Ooi et al (2010). In contrast, there is no debt limit for US REITs.…”

Solutions for Thai Property Funds’ Performance Improvements

“…The market, however, expects the managers to acquire reasonable assets to benefit to the unit holders, not just anticipate increasing asset under management and consequently management fees as in [39]. After announcements of new property acquisition of Singapore and Japan REITs, significant abnormal increase of unit value has been averagely found 0.38% in a five trading days around the event date as in [42]. However, [24] found that there is no benefits from size for EU REITs, especially after the subprime crisis.…”

Identifying Stock Market Reactions to Acquisition Announcements in Taiwan Land Auction

“…In the context of REITs, Allen and Sirmans (1987) and Campbell et al (2003) document that REITs enjoy excess abnormal returns when acquiring other REITs or real estate portfolios. Ooi et al (2011) suggest that newly listed REITs can increase stockholder wealth by acquiring a number of properties.…”