This ANREV report investigates the relationship between the capital structure and performance of Asia Pacific non-listed real estate funds.
It examines whether the inflation hedging quality of real estate can be further improved by the use of debt to finance the real estate assets. This proposition is based on the school of thought initiated by Fisher and Keynes, which suggests that in times of high inflation, debt will help hedge the real value of firm equity.
The theory predicts that if a real estate asset was to be financed with fixed rate debt, high inflation would be beneficial to the real estate investor, as while the value of the real estate asset erodes (in real terms), the value of its debt erodes as well.
This report empirically examines whether this hypothesis applies for Asia Pacific non-listed real estate funds, and whether funds holding greater debt tend to have better returns during periods of high inflation.
A regression analysis was performed on Asia Pacific non-listed real estate funds to determine the role of leverage in hedging against actual and unexpected inflation.
The results show evidence that these funds provide hedging against inflation and that the use of leverage at moderate levels enhances their inflation hedging capabilities.
However, the findings for unexpected inflation provide an inconclusive indication that these funds can potentially hedge against unexpected inflation outside the ‘typical’ lease structure, given that Asia Pacific commercial leases tend to be varied and heterogeneous in nature. Nonetheless, investors can extract information about inflation hedging abilities of these funds from capital structure data, thus promoting efficient investment decisions.
The report also found that gearing style matters…
