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Analysing The Deleveraged Performance Of Australian Wholesale Property Funds

Author/s: David Higgins

Date Published: 1/01/2011

Published in: Volume 17 - 2011 Issue 3 (pages 404 - 417)

Abstract

This research examines the impact of debt on the performance of Australian unlisted wholesale property funds. The research benchmarked eight leading property funds leveraged and deleveraged performance to the corresponding property market indices. The results for the 2002–2009 period were mixed as to the leveraged property funds outperforming their respective property market indices. On removing debt, only one property fund managed to beat both the return and risk reading from the corresponding property market index. The marked variations between leveraged and deleveraged performance had limited impact on property fund rankings as it appeared the variation in commercial property lending rates had a greater impact than property fund leverage levels, which averaged 15.31%. To add to the familiar risk and return benchmarks, the risk adjusted performance (RAP) measure, first outlined by Modigliani and Modigliani (1997), provided a comparative return for a given level of risk. On quarterly unleveraged property fund data, the RAP 1.74%–3.25% range highlighted the considerable differences in the property funds performance for a given level of risk. Of the eight selected property funds, only one provided excess returns from portfolio selection. This RAP approach is a powerful investment tool, as it can highlight the property fund manager’s asset allocation capabilities to add value.

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Keywords

Investment Analysis - Property Leverage - Unlisted Property Funds

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