An Exploratory study of the performance characteristics of the property vehicles listed on the New Zealand Stock Exchange (NZX)

Abstract

There are two listed property investment vehicles on the New Zealand Stock Exchange (NZX), namely Listed Property Trusts (LPTs) and Listed Property Investment Companies (LPICs). Historically the proportion of New Zealand LPTs to LPICs has varied over the years due to failures and new listings. More recently a new trend has emerged that has impacted on these proportions, which has been the corporatisation of some of the LPTs. As a result the number of Trusts on the stock exchange (NZX) reduced significantly in 2010 and two other trusts have also been considered following this trend. From the literature it can be seen that there is a lack of empirical evidence that can assist stakeholders in justifying either the immense costs involved in these conversions or the decision not to convert.

The purpose of this exploratory study was to determine whether the LPTs performed differently to the LPICs, in order to justify the choice of adopting a company structure and in the case of conversions to justify the immense costs involved. The objectives of the study were: (1) to reveal the nature and significance of NZ’s LPVs in the NZ investment market, (2) to explore the performance characteristics NZ’s LPVs, (3) to reveal any reward-to-risk benefits for investors by investing in either LPTs or LPICs, and (4) to reveal any diversification benefits for investors by investing in either LPTs or LPICs. Evidence

The study developed three new separate gross (total) return series indices: the overall LPV sector index, the LPT sub-sector index, and the LPIC sub-sector index. These new indices were created so that the performance characteristics of these indirect property vehicles could be examined over the study period 1994:Q1 to 2011:Q3. The effect of different market conditions on the performance of these vehicles was also assessed by analysing the performance of the LPTs and the LPICs over specified sub-periods: (1) the pre-Asian crisis, (2) the Asian crisis to pre-Global Financial Crisis, and (3) the Global Financial Crisis (GFC) and post-Global Financial Crisis.

Data to develop the three new indices was sourced from NZX database. Existing gross (total) return indices for stocks (NZX All Gross (Total Return) Index) and Government bonds (ANZ All Government Bond (Gross) Index) were also sourced from the NZX database and for direct property (All Property Total Return (Gross) Index) was sourced from the Property Council of New Zealand/Investment Property Databank (PCNZ/IPD). The risk free rate of return to compute the Sharpe measure was sourced from the Reserve Bank of New Zealand (RBNZ) database.

The results showed that LPTs and LPICs have performed differently over the seventeen year study period and the sub-periods, which suggests there is a relationship between the ownership structure and performance characteristics of New Zealand’s Listed Property Vehicles (LPVs). Historically it was found, that overall the LPICs have offered investors’ superior risk-reduction and reward-to-risk benefits compare to the LPTs.

The findings, in this study, offer empirical support to the argument presented in previous studies (Korda Mentha, 2010; Grant Samuel, 2010, 2011), that a company structure is the optimal ownership structure to improve performance in a New Zealand context. The practical implications of these findings include assisting investors’ by providing empirical evidence to justify their support of future conversions and also assisting stakeholders who are deciding which ownership structure to adopt when setting up a listed property vehicle. From a theoretical viewpoint these findings also suggest that the LPICs and LPTs can be treated as separate asset classes and that further segmentation studies of the NZX Property Sector could be undertaken to better understand the nature of these collective investment vehicles.