Ting_Stability_of_REIT_Dividends

Ting_Stability_of_REIT_Dividends - 13TH PACIFIC RIM REAL...

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Unformatted text preview: 13TH PACIFIC RIM REAL ESTATE SOCIETY ANNUAL CONFERENCE Fremantle, Perth, Australia 21 – 24 January 2007 Stability of Dividends and FFOs: The Case of REITs in Malaysia Ting Kien Hwa and Mohd Yunus Abdul Rahman Department of Estate Management Faculty of Architecture, Planning & Surveying University of Technology MARA 40450 Shah Alam, Selangor Malaysia Telephone : 603 - 5544 4217, Fax : 603 – 5544 4353, e-mail : tingkienhwa@yahoo.com Keywords : dividends, FFOs, LPTs, Malaysia 13 th Pacific Rim Real Estate Society Annual Conference Ting Kien Hwa 2 Stability of Dividends and FFOs: The Case of REITs in Malaysia Abstract Historically, the dividends of real estate investment trusts (REITs) contribute significantly towards the total return of REITs. This paper examined whether dividend returns of REITs/LPTs in Malaysia are affected by economic conditions and whether the level of dividends declared could be sustained in a weak economy. The research shows that the dividends declared by listed property trusts (LPTs) are found to be not stable as it is affected by the level of funds from operations (FFOs) attained by LPTs. FFOs are in turned affected by its sources of income. LPTs with investments of unstable market values e.g. shares which have declined in values is found to affect FFOs due to the need to account for its diminution of values in the accounts. The findings have an impact on investors who expect consistent dividend distributions from LPTs thereby affecting their investment allocations on LPTs. Keywords : dividends, FFOs, LPTs, Malaysia 13 th Pacific Rim Real Estate Society Annual Conference Ting Kien Hwa 3 Introduction Real estate investment trusts (REITs) have traditionally been able to attract investors because of their relatively low risks and high dividend yields. The high dividend yield of REITs is the main reason investors invest in the REIT market. Investors e.g. pensioners who rely on regular dividend payments are attracted to REITs as an income producing investment. REIT returns are composed of both price appreciation and rental yield from real estate. The rental component forms a significant portion of REIT return. Income streams from real estate are more predictable and relatively low in volatility compared to changes in capital values. The low volatility coupled with the high payout in the form of dividends adds a bond-like feature to REITs. However rental incomes from investment properties are cyclical and may come under pressure during poor economic conditions. Thus the stability of dividends of REITs is an important issue. The reasons why REITs consistently pay out high dividends are for the following reasons (Chan, Erickson and Wang 2003): (a) to reduce agency costs, (b) to signal private information, (c) to signal the volatility of future cash flows, (d) to reduce information asymmetry, (e) to attract investors....
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Ting_Stability_of_REIT_Dividends - 13TH PACIFIC RIM REAL...

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