Debt and REIT performance: Evidence from Australia

Firms finance operations in one of three ways: retained earnings, debt or the issuance of equity. The Australian REIT sector experienced phenomenal growth in the early 2000s outperforming the ASX200 as funds borrowed aggressively to fuel expansion. However, the sector collapsed during the financial crisis of 2007-09 which was due in part by its heavy reliance on debt and increased exposure to financial risk. Since then, the sector has recovered under a low interest environment while capital structures have been reconfigured through a combination of debt retirement and equity raisings.This study aims to explore the relationship between debt and the performance of the REIT sector in Australia which is important as over AUD114bn are currently invested in the property sector via superannuation funds (pension funds) representing approximately 8 percent of total holdings.Utilising panel data from the Australian market over a 20 year period spanning multiple economic cycles, REIT performance was found to have an inverse relationship to leverage even after controlling for factors such as market risk, inflation and economic growth. The adverse effects are further compounded with increasingly higher levels of gearing. Additionally funds with low interest coverage ability and insufficient free cash flows also exhibit greater exposure to gearing risk.