Discussion Paper No. 920

THE ROLE OF SPONSOR
AND EXTERNAL MANAGEMENT
ON THE CAPITAL STRUCTURE
OF ASIAN-PACIFIC REITS:THE CASE OF AUSTRALIA, JAPAN,
AND SINGAPORE
Dong Chen, Yanmin Gao
Mayank Kaul, Charles Ka Yui Leung
Desmond Tsang

January 2015

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

The Role of Sponsor and External Management on the Capital
Structure of Asian-Pacific REITs: The Case of Australia, Japan,
and Singapore
DONG CHEN
Economics and Management School
Wuhan University
Email:chendongwinter@126.com
YANMIN GAO
Department of Accountancy
City University of Hong Kong
Email:yanmigao@cityu.edu.hk
MAYANK KAUL
Real Estate Risk Management Division
Citibank
Email:mayank.kaul@citi.com
CHARLES KA YUI LEUNG
Department of Economics and FinanceCity University of Hong Kong
Email:kyc.leung@cityu.edu.hk
DESMOND TSANG
Desautels Faculty of Management
McGill University
Email: desmond.tsang@mcgill.ca

This version: January, 2015

Abstract
This paper studies how the presence of sponsor and external management affectleverage and debt maturity decisions in three major Asian-Pacific REIT markets:
Australia, Japan and Singapore. Our empirical results indicate that sponsored
REITs opt for higher levels of leverage and loans with longer maturity. On thecontrary, externally managed REITs are associated with lower leverage and loans
with shorter maturity. Our results are robust to the inclusion of other firm variables
and to alternative specifications. Subsequent to the financial crisis, the impact ofsponsorship on debt financing decisions has diminished, and borrowing of
externally managed REITs is further constrained.

Keywords: Asian-Pacific REIT markets, capital structure, debt maturity,
simultaneous equation modelling, financial crisis

JEL Classification Numbers: F30, G10, R30

1

I.

INTRODUCTIONREIT (Real Estate Investment Trust) research in Asia-Pacific area has gained attention inrecent years. There are several reasons for that. First, commercial real estate (CRE) constitute asignificant amount of corporation asset and yet they are typically not frequently traded.1 Thus, toproperly price CRE, many analysts use REIT, which are publicly traded, as a proxy. Second, theAsian-Pacific REIT markets have experienced tremendous growth in terms of the number of
REITs as well as their market valuation, especially over the last decade. As of January 2014, thelargest REIT market in the region is Australia, followed by Japan and Singapore. Together, thesethree REIT markets include 98 publicly-listed REITs with a combined market capitalization of
US$202.6 billion. 2 The recent establishment of the REIT structure and the flourishing REIT
equity market in the Asian-Pacific region has sparked interest from practitioners and academics
to better understand these Asian-Pacific REITs. Given that the Asian-Pacific equity markets are
relatively young and these REITs are known to pursue aggressive acquisition strategies (Ooi et al.
2011), one vital puzzle is how these REITs can sustain their growth through financing. This isespecially important for entities such as REITs because they are characterized by high dividend
distribution which limits their abilities to use internal fund to satisfy their capital needs, and areconsequently heavily reliant on long-term debt financing for property acquisition (Ott et al.
2005).
Prior research on financing and capital structure decisions of REITs focuses
predominantly on the U.S. market (e.g., Howe and Shilling 1988; Capozza and Seguin 2000;
Brown and Riddiough 2003; Feng et al. 2007; Boudry et al. 2010). For instance, Howe and1Among others, see Jin et al. (2012), Du et al. (2014) for more discussion.
For comparison purpose, the U.S. REIT market has currently a total of 166 firms and a combined market
capitalization of US$683 billion (Source: SNL Database).
22

Shilling (1988) examine the tax-exempt status of U.S. REITs and argue firms should use little orno debt in their capital structure. Capozza and Seguin (2000) find that cost of debt and equity arehigher for more diversified REITs. Brown and Riddiough (2003) find that REITs’ financing
choice depends on their pre-existing corporate structures, in which firms with higher existing
debt (equity) issuing equity (debt) in subsequent offering. They also show that REITs target along-run leverage ratio with the objective of maintaining an investment grade rating. Feng et al.
(2007) show that REITs with historically high market-to-book ratios tend to have persistently
high leverage ratios, and they attribute the findings to the existence of the special regulatoryenvironment of U.S. REITs, with limited tax-shield benefits on debt interest payments given
their tax-exempt status. Boudry et al. (2010) show that REITs are less likely to issue debt whenbankruptcy costs are high and interpret this finding as support of the trade-off theory (e.g., Kraus
and Litzenberger 1973), in which the benefits of debt are offset by the risk and cost of debt.
Several other studies switch their focuses from the U.S. REIT market and examine capital
structure decisions in other listed real estate companies. Ooi (1999b) find that asset structure (i.e.,
proportion of non-monetary real estate assets within firms) and the level of involvement inproperty development are important determinants of corporate debt policy in U.K. property
companies. Bond and Scott (2006) show that when U.K. real estate firms turn to externalfinancing, debt constitutes the majority of securities issued. This confirms with the pecking ordertheory (e.g., Majluf and Myers 1984) in which firms would prefer debt to equity as debt issuance
has a small negative impact on stock price. Examining stock price reactions of equity and debt
offerings for a sample of European property companies, Brounen and Eichholtz (2001) document
significant negative price reactions with equity offering, and variations in stock reaction are3related to size of the issue, pre-offer leverage, underlying property types as well as operating
performance.
Leland and Toft (1996) argue that capital structure is not a standalone choice and optimal
leverage is a function of a firm’s risk as well as its debt maturity. Giambona et al. (2008) andAlcock et al. (2014) highlight the importance of the multidimensionality of capital structure
choices in the real estate industry 3 noting that, when REITs issue debt, a crucial andsimultaneous decision is to determine the maturity term of the debt contracts. Research in debt
maturity choices has found some determinants for maturity in REIT debts. For example, Ooi(1999a) suggests a weak relationship between long-term debt issuance and macroeconomic
factors such as interest rate movements. Highfield et al. (2007) find that firms with higher
growth issue shorter maturity debts, but find no evidence of future operating performance
affecting debt maturity. Nagano (2010) examines J-REITs and shows that REITs which invest in
more liquid property types are able to issue longer-term debts. Ghosh et al. (2011), using
simultaneous equations for leverage and maturity, examine various corporate governancemechanisms (such as entrenchment and board effectiveness) on the capital structure of REITs.
Their findings suggest that entrenched CEOs use less leverage and shorter maturity debts.
Our research objective in this study is to examine capital structure decision making, onleverage and maturity, in the Asian-Pacific REIT markets. In particular, we are interested in how
the characteristics of these Asian-Pacific REITs differ from their U.S. / European counterpartsand how these differences could affect capital structure choices. Prior research (e.g., Ooi et al.
2006; Wong et al. 2013; Lecomte and Ooi 2013) show that Asian-Pacific REITs have several

3

Studies such as Barclay et al. (2003) and Johnson (2003) have examined the simultaneity of leverage and debt
maturity decision in other industrial firms.

4unique features that are substantially different from REITs in other regions, in particular the U.S.
4

We conjecture two factors that could have a significant impact on leverage and maturity of

Asian-Pacific REITs: the presence of sponsors and the management structure of REITs.
Some previous studies inspire us to consider the presence of a sponsor to be an importantfactor on the capital structure determination in Asian-Pacific REITs. A publication by the CFA
Institute (2011) highlights the sponsor plays a central role in many Asian-Pacific REIT markets.
In its simplest form, a REIT sponsor is usually a large real estate company with investment in a
REIT and maintains significant control over the REIT manager.5 It also tends to be the entity thatsources the properties placed into the REIT at the time of IPO. Extant finance literature (e.g.,Barry et al. 1990; Megginson and Weiss 1991) argue that reputable sponsors provide quality
certification which reduces information asymmetry in the IPO market. Recently, Wong et al.
(2013) test whether sponsors in Asian REIT IPOs alleviate moral hazard concerns. They find apositive and significant bi-directional relationship between the fraction of shares held by thesponsor in IPO and the level of underpricing, implying the presence of a sponsor indicates to themarket that the REIT has the support and guidance of an experienced market participant. Hence,
we suppose the debt market would favor lending to a REIT with sponsor as their credit risks canbe partially offset by sponsor support. We predict that Asia-Pacific REITs with sponsors raise
higher leverage and they are able to issue debts with longer maturity.
We also believe that the management structure of the Asia-Pacific REITs may be
important for the corresponding capital structure. First, notice that while the U.S. REIT market
has mostly transitioned from externally managed to internally managed REITs (Ambrose and4

Recently, Packer et al. (2014) provide a global overview of the REIT market worldwide.
The REIT manager can be an external third party in an externally managed REIT, or an internal manager in aninternally managed REIT.
5

5

Linneman 2001), REITs in the Asian-Pacific region are essentially externally managed (EPRA
2008). The preference for an external management model in the Asian-Pacific REIT markets is acombination of history and precedent at the time of their formation, when Japanese andSingaporean REITs were modelled after the Australian market that was predominantly externallymanaged at that time following the early U.S. model (APREA 2014). An externally managed
REIT requires an appointment of an external party, usually another real estate corporation,
responsible for managing the assets owned by the REIT. This external party acts as a manager ofthese REIT properties and has a fiduciary duty to act in the best interest of REIT shareholders.
On the other hand, an internally managed REIT employs its own staff to manage its own assets
and operate similar to a normal C-corporation. Prior research (e.g., Capozza and Seguin 2000)
document the underperformance of externally managed REITs in the U.S. market in the 1990s,
highlighting the agency problems created by the externally managed REIT organization structure
and arguing external parties may use their control to extract value from the REIT entities to thedetriment of REIT shareholders. Based on the U.S. data, . Cannon and Vogt (1995) show thatexternally managed REITs are less levered as compared to internally managed firms. As debt
financing is typically cheaper than equity financing, the authors interpret their findings asevidence of an externally managed structure having sub-optimal returns due to the conflicts ofinterest between the REIT shareholders and the external advisors. Following similar reasoning,
we conjecture that externally managed Asian-Pacific REITs are less likely to engage in debt
financing. Moreover, these externally advisors are less likely to help the REITs to secure debts
with longer maturity that minimize liquidity and refinancing risks.
Our empirical analysis utilizes REIT data from Australia, Japan and Singapore over the
sample period of 2005-2011. We focus on these three Asian-Pacific markets because they are the6largest REIT markets in the region and at present, data on other markets are relatively sparse.
Our findings indicate that our two key variables, Sponsor and External Management,
significantly affect both leverage and debt maturity. We show that sponsored REITs opt forhigher levels of leverage and loans with longer maturity. On the contrary, externally managed
REITs are associated with lower leverage and they pursue loans of shorter maturity. Our results
are robust to the inclusion of other firm variables that influence debt decisions of Asian-Pacific
REITs, and to alternative specifications which we model leverage and debt maturity as
simultaneous decisions (Giambona et al. 2008; Ghosh et al. 2011; Alcock et al. 2014).
Given that our sample period is coincidental with the recent global financial crisis, we
conduct further analysis to examine the impact of financial crisis on the relationship between
debt financing and sponsorship and management structure. We show that, subsequent to thefinancial crisis, the impact of sponsorship on debt financing decisions has diminished whileborrowing of externally managed REITs is substantially constrained. Overall, our evidence
support the view that external management is detrimental to debt financing as external advisory
may opt for higher-cost equity financing at the expense of REIT shareholders, and the presenceof sponsor serves as a signal of quality that reduces information asymmetry between REIT
management and debt holders allowing for more debt funding with longer repayment terms.
Our study contributes to extant real estate research in the following ways. First, we
extend the literature on Asian-Pacific REITs. As the market is relatively young and only a shorttime series of data are available, there is limited empirical research on Asian-Pacific REITs (e.g.,
Ooi et al. 2006; Ooi et al. 2011; Wong et al. 2013; Lecomte and Ooi 2013). We focus on the
distinctive features of these firms to examine how the presence of sponsors and externalmanagement affect their corporate financing decisions. Second, we add to the REIT literature on
7

capital structure by identifying factors that influence debt decisions for Asian-Pacific REITs. We
show that, in the context of Asian-Pacific REITs, there are additional factors one should consider
when analyzing capital structure decision making. Third, with the development of REITs
currently underway in other major Asian markets such as China and India, our study bears
foremost policy implications to firms in these new markets. We show that, despite the popularityof the external managed REIT structure in the region, principal-agent conflicts may prompt these
REITs to behave differently in financing decision making.
The remainder of the paper is organized as follows. Section two outlines the research
design and depicts our empirical methodology. Section three describes the sample selection
process and shows summary statistics of the sample. We present, in section four, the empiricalresults. Finally, the last section offers some concluding remarks.

II.

RESEARCH DESIGN
Our objective is to examine the impact of sponsorship and external management on thelevel of leverage and debt maturity in Asian-Pacific REITs. We follow the framework of Ghoshet al. (2011) but include two additional variables to proxy for the presence of sponsor andexternal management. Our model specifications are depicted as follows:
Leverage = β0 + β1 Sponsor + β2 External Management + β3 Controls(1)

Debt Maturity = β0 + β1 Sponsor + β2 External Management + β3 Controls(2)8where Leverage is defined as the ratio of total debt to total assets (e.g., Alcock et al. 2014), andDebt Maturity is the weighted average maturity of all debts in a REIT (e.g., Ghosh et al. 2011).6
Sponsor is a dummy variable equal to one (zero otherwise) if the REIT has a sponsor. To
determine whether a REIT has a sponsor, we need a REIT to satisfy two criteria. First, wemeasure the shareholdings of the top five shareholders7 and consider a firm as having a sponsor
if shareholdings of these top investors are more than 10% because a sponsor should havesubstantial financial stake in the company. Another requirement of sponsor is that it should havesignificant involvement in the company. Hence, we verify whether these investors have
involvement by manually reviewing the prospectus and annual reports of each REIT. We expect
REITs with sponsor have higher levels of leverage and longer maturity debts, and thus positivecoefficients for β1. External Management is a dummy variable with value one (zero otherwise) if
the REIT is externally managed. We expect externally managed REITs have lower levels ofleverage and shorter maturity debts, and thus negative coefficients for β2.
We include a set of control variables traditionally used in the literature to explain
leverage and debt maturity. Following Ghosh et al. (2011), we include different sets of controls
for leverage and debt maturity, and these are the same set of control variables as reported inTable 1 of Ghosh et al. (2011). In model specification (1), we include Market-to-Book, FirmSize, Profitability (ROA), Cash Flow Volatility, Market Access, Asset Liquidity and Firm Age. Inmodel specification (2), we include Market-to-Book, Firm Size, Firm Size Squared, Cash Flow
Volatility, Earnings Growth, Market Access, Asset Liquidity, Asset Maturity and Firm Age.
6

We follow similar approach as in Ghosh et al. (2011) and calculate the weighted average maturity multiplying thepercentage of debts maturing in each time horizon for each REIT reported in the SNL database (i.e., within 12
months, 1-6 years, more than 6 years) by the midpoint of the categories in within 12 months (i.e., 0.5 year) and 1-6
years (i.e., 3.5 years). For debts maturing in more than 6 years, we use a factor of 6. We argue the measure of
maturity in Ghosh et al. (2011) make better use of the firm’s whole maturity structure.
7
We also include any ownership termed “Strategic Entities” from Thomson One.

9Market-to-Book is measured as total assets minus book equity plus market equity and thendivided by total assets, and is used as a proxy for firms’ growth opportunities. Myers (1977) andHart and Moore (1995) show that firms with growth opportunities would underinvest if thebenefits go partially to debt holders. Alternatively, growth firms could be more reliant on debt
financing to sustain their growth. Hence, we offer no directional prediction on the variable. We
include Firm Size, the natural logarithm of the book values of total assets. Johnson (2003) andStohs and Mauer (1996) use this variable to signal firm quality, and we expect it to be positively
related to leverage and to debt maturity. We also include Firm Size Squared to control for nonlinearity in debt maturity (Diamond 1991a) and expect a negative coefficient. Myers (1984)shows firms with higher profitability would prefer to use internal funds to debt financing; hence
we include Profitability (ROA), an accounting measure of return-on-assets (net income divided
by book values of total assets), as a determinant of leverage and expect a negative coefficient.
Cash Flow Volatility, time-series standard deviation of cash flows from operations, signifies theinherent risks in the firm’s cash flows. We expect higher risks constrain the financing ability offirms, and therefore negative impact on leverage and debt maturity. Earnings Growth is a proxyfor influences of asymmetric information on a firm’s capital structure and we measure it by theforward-looking actual growth rate of earnings (measured as change in earnings-per-share fromtime t to t+1 scaled by share price). We expect negative relation with debt maturity as higher
growth implies more favorable information and firm should opt for shorter-term debts to takeadvantage of the lower cost in refinancing (Flannery 1986; Diamond 1991b; 1993). Market
Access, a dummy variable equal to one (zero otherwise) for firms with public debt ratings, isincluded in both leverage and debt maturity equations. Faulkender and Peterson (2006) show afirm’s access to the public debt market allows it with more flexibility to adjust their capital10

structure, so it can obtain higher leverage and debts with longer maturity (hence we expect
positive coefficients). We include Asset Maturity, which is the weighted asset maturity based on
current assets divided by operating expenses (Barclays et al. 2003), as a determinant of debt
maturity because firms have a tendency to match their assets with liabilities on their term
structures. Hence, we expect positive coefficient for this maturity matching effect. Giambona etal. (2008) and Nagano (2010) argue that asset liquidity is an important determinant for debt
financing decision. Hence, we also include Asset Liquidity, measured as an ordinal scale of 1 to 5
based on the property type investment of the REIT.8 However, we offer no directional prediction
as more liquid assets could either lower the needs of debt financing or raise the ability of firms toraise funds. Finally, Firm Age is measured by time (in years) since public listing of the firms. As
mature firms have lower financing needs (Faulkender and Peterson 2006), negative relationshipcould exist between firm age and leverage. Alternatively, mature firms are better able to obtaindebt financing and firm age can be positively related to both leverage and debt maturity. Thus
firm age can be positively or negatively related to the debt financing variables. In our empiricalanalysis, we also include year and country dummies to control for macroeconomic time effectand institutional differences across the three countries.

III.

DATA AND DESCRIPTIVE STATISTICS

8

The scale is ordered from the most liquid to the least liquid REIT property types: 1. Retail and office; 2.
Diversified; 3. Industrial; 4. Hotels and Multifamily; 5. Healthcare. The appropriate measure of Asset Liquidity
would be the average maturity of the outstanding leases, with longer average maturity indicating higher asset
liquidity values. However, we were unable to obtain this data for all the markets. Based on practical experience, we
believe the level of investment activity in the various property types reflects the liquidity in a particular asset class.

11

Our sample includes 81 equity REITs from Australia (22), Japan (33) and Singapore (26)over the sample period of 2005-2011 from the SNL Database. These equity REITs can beclassified into seven major property types: retail, office, multi-family, industrial, hotel,
healthcare and diversified. We choose 2005 as the first year because the markets of J-REITs and
S-REITs grow substantially only since 2005 (FDSC 2013). In total, there are 386 firm-year
observations. We eliminate 135 observations due to missing data on leverage and other firm andfinancial variables. We eliminate another 90 observations with missing information on debt
maturity. Our final sample comprises 161 firm-year observations.
Table 1 presents the descriptive statistics for variables used in the empirical analysis. Ourdependent variables Leverage and Debt Maturity report means of 0.38 and 2.82 respectively. The
key variables of interest, Sponsor and External Management, have means of 0.53 and 0.88
respectively. Consistent with expectation, the sponsor structure is quite common among the
Asian-Pacific REIT markets and most of these REITs are essentially still externally managed.
Table 1 also reports summary statistics of the control variables. On average, our sample firms
have a market-to-book ratio of 0.92 and they seem to be relatively young firms with an averageage of 4.49 years.
In Table 2, we present descriptive statistics comparing the means of variables for firms
with and without sponsor and for firms adopting external versus internal management structure.
Firms with sponsors seem to have much higher levels of leverage than firms without sponsor(mean of 0.43 versus 0.34, difference statistically significant at 1%). Moreover, firms that are
externally managed report much lower levels of leverage (mean of 0.36) than internally managed
firms (mean of 0.50, difference statistically significant at 1%). However, we do not observe any
significant differences across the subsample groups in terms of debt maturity. Of the control
12

variables, we find that firms with sponsor are significantly smaller, more profitable, and withhigher asset liquidity. We also find firms with external management are larger, more profitable
but with lower earnings growth. These firms also have better access to market and lower asset
maturity.

IV.

EMPIRICAL ANALYSISOur main empirical results are presented in Tables 3 and 4. Table 3 shows regression

results of the impact of sponsor and external management on leverage. Given the concern ofpossible correlations between observations across firms in the same country, as well as timespecific effect (for instance, the bankruptcy of Lehman Brothers occurred in 2008 may impact
the global capital market and hence the financing of REITs), we adopt the Generalized Least
Square (GLS) regressions in the empirical analysis.9 The first two columns in Table 3 show
results of the GLS regressions. The first column shows results of regressing Leverage on
Sponsor and External Management. We find that Leverage is positively related to Sponsor andnegatively related to External Management (both statistically significant at the 1% levels). It istrue when the country fixed effect is taken into account. The findings confirm our notion thatsponsor has a positive impact on debt financing for the Asian-Pacific REITs. With the presenceof sponsor, banks are more willing to extend credit to these REITs. It could be due to sponsor
serving a monitoring and governance role in the company, increasing the confidence of creditors
lending to these firms. It could also be that sponsor may possibly bail out the REIT in trouble,

9

Hsiao (2009), Hsiao and Tahmiscioglu (2008), among others, show that through a specially designed datatransformation, it is possible to obtain unbiased estimates in a panel data set with both (cross-sectional) firm-level
fixed effect and (inter-temporal) time-specific effect with GLS. For an application of this method in the real estate
literature, see Dong et al. (2012), among others.

13lowering the risks of nonpayment from the perspective of creditors. The findings also reinforce
the negative relationship between external management and leverage, indicating externally(internally) managed firms are less (more) likely to obtain debt financing. External REIT
managers could be less devoted in securing the cheapest way of debt financing for the REITs andmay opt for equity financing instead. Moreover, the lenders, fully realizing the principal-agent
conflicts in externally-managed REITs, could become more concerned extending credit to thesefirms. Table 3, second column, presents the empirical results of the full model with the control
variables. We find that leverage tends to be negatively related to profitability and asset liquidity,
and positively related to cash flow volatility,10 market access and firm age. We continue to findsignificant positive coefficient for Sponsor and significant negative coefficient for ExternalManagement.
Alcock et al. (2014) show that leverage and debt maturity are joint financing decisions
for U.S. listed real estate firms. Hence, leverage and debt maturity could be simultaneously
determined. Consequently, we adopt an instrumental variable (IV) approach to examine theimpact of sponsor and external management on these financing decisions. In our first stages, we
regress leverage and debt maturity on the explanatory variables using specification (1) and (2)respectively. The residuals of these first-stage regressions are presumed to be orthogonal to theother factors and they serve as the instrumental variables in the second-stage regressions. In
other words, we use the residuals of the first-stage leverage (debt maturity) regressions as
instruments for the debt maturity (leverage) in the second-stage regressions.

10

We note our findings are in contrast to prior findings such as Bradley et al. (1984). We believe a possible
explanation can be attributed to the trade-off theory (Hart 1993), which posits when undertaking unprofitable newinvestment projects poses greater threat to the firms’ value than inefficient liquidation, optimal leverage will
increase with cash flow volatility. In particular, the Asian-Pacific REIT markets are characterized by primarily
borrowing from the bank loan market, which are shown to have low threat of inefficient liquidation (Berlin and
Loeys 1988).

14

We present the findings of the impact of sponsor and external management on leverage
under the instrumental variable (IV) approach in the third to fourth columns in Table 3. We find
our main results remain intact, that is, sponsor continues to positively influence leverage andexternal management continues to negatively influence leverage. Though we find leverage anddebt maturity are negatively related in column three, the correlation becomes insignificant once
we include the set of control variables in the fourth columns.
We now focus on the impact of sponsor and external management on debt maturity.
Table 4, columns one to two, report the results of the GLS regressions. We find significant
positive coefficients for Sponsor, indicating with the presence of sponsor, REIT firms are able toobtain loans with longer term to maturity. We also find significant negative coefficient forExternal Management in column two, implying that externally managed REITs fail to negotiate
for longer-term loans. Of the control variables, we find debt maturity is positively related to theMarket-to-Book ratio and Market Access, and negatively related to Asset Liquidity. In the third to
fourth columns, we report the results under the instrumental variable (IV) approach. We continue
to find the positive impact of Sponsor and the negative impact of External Management on debt
maturity. Interestingly, Leverage is also a significant determinant of debt maturity in columns
four. The results suggest that, though leverage and debt maturity appear to be joint financing
decisions, the decision of debt maturity is more dependent on the level of firm leverage than viceversa. And again, we allow for country fixed effects and they turn out to be statisticallyinsignificant.
The Impact of Financial Crisis

15

The recent global financial crisis has had a huge impact on financial, especially realestate, markets around the world. Though one can argue the real estate markets in Asia were lesshit, Kim (2009) shows that linkages between the U.S. and Australia REIT sectors are strong andLiow (2012) shows REIT sectors among countries in the Asia-Pacific regions are relatively cointegrated. Moreover, Claessens and Fan (2002) show that corporate governance is typicallyweak in Asia as conventional corporate governance mechanisms have limited effectiveness inAsian countries with weak institutions and poor property rights. We therefore conjecture banklenders would be less likely to extend loans to Asian-Pacific REITs subsequent to the financial
crisis. In particular, lenders would be more concerned with REITs that are non-sponsored andexternally managed since these firms signify weaker governance and higher principal-agent
conflicts. We focus on the post-crisis period instead of the crisis period because while the AsianPacific REIT markets were less affected during the crisis, the lending practices of the Asianbanks may change after the crisis.11 In fact, it is evident that the financial crisis has led to a hugewave of financial reforms at banks around the world only after the crisis.12 We empiricallyinvestigate the effect of the global financial crisis on the relationship between sponsor andexternal management with debt financing decisions by augmenting the specifications (1) and (2)with the introduction of a Post Financial Crisis (PFC) variable and the interaction terms of Post
Financial Crisis with Sponsor and External Management.13 Following Devos et al. (2013), we

11

There is growing empirical evidence for changes in bank lending practices, including Kwan (2010) for the U.S.
banks, Fraser (2012) for the Banks in U.K., Solheim and Vatne (2014) for the banks in Norway.
12
In unreported analysis, we also investigate the effect of the financial crisis by analyzing the impact on debt
financing decisions during the financial crisis instead of post crisis. We find the relationships of debt financing andSponsor and External Management remain unaffected in the crisis period, confirming with our conjecture that debt
financing decisions have been altered for the Asian-Pacific REITs only after the crisis. See also James et al. (2014)
and the reference therein for more discussion on this topic.
13
We do not include year dummies in the regressions because of the correlated nature between our crisis variable
and the year dummies.

16

define the financial crisis from the beginning of 2007 to the beginning of 2009, and thus our PFC
variables is equal to one if the observation lies in the period of 2009-2011, zero otherwise.
Results presented in Table 5 shows the relationship of leverage and Sponsor and ExternalManagement. GLS results in the first two columns show that Sponsor continues to exert apositive impact on leverage over the sample period, although the effect is weaker than before.
Yet, the interaction term of PFC and Sponsor is surprisingly negative and significant in column
two. We interpret the results as follows. Devos et al. (2013) show that during the crisis,
institutional owners have fled the U.S. REIT market despite that they are supposed to serve themonitoring role for these firms. Hence, Asian banks might have similar concerns with thesesponsors with Asian-Pacific REITs, and thereby constraining the lending practices to sponsored
REITs accordingly subsequent to the crisis. The GLS results also show that the main effect ofExternal Management is no longer significant but the interaction term between PFC andExternal Management is highly significant at the 1% levels, indicating externally managed
REITs have substantially lower leverage mostly in the post-crisis period. As expected, we findthat the financial crisis variable PFC has negative coefficients on leverage. Moreover, thecountry fixed effect of Australia is consistently negative (relative to Japan).14 This result may berelated to the fact that in the post-crisis period, major central banks adopt unconventionalmonetary policies, which leads to a significant increase in commodity prices. As a commodityexporting country, Australia authorities respond by adjusting monetary policies and macroprudential policies, which have consequences on the real estate markets and the leverage of

14

In contrast, the positivity of country fixed effect of Singapore vanishes, once we control for other variables, suchas Cash Flow Volatility and Market Access.

17

REITs.15 The third to fourth columns of Table 5 show similar findings under the Instrumental
Variable (IV) approach.
The country fixed effect for Singapore (relative to Japan) is also significant but the story
may be different. Notice that while Australia practices inflation-targeting type monetary policy,
Singapore adopts an exchange rate anchor type policy, which leads Singapore’s responses tocrisis different from Australia. 16 And according to Doraisami (2011), the GDP of Singapore
contracted by more than 6% in the first half of 2009 and exports fell by more than 20% in thefirst quarter of 2009. Singapore government responded with a fiscal stimulation package, whichamounted to about 8% of GDP at the time. Thus, the negative fixed-effect may be the result of
the “contraction effect” of the global financial crisis.17
Lastly, Table 6 reports results which we examine the relationship between debt maturity
and Sponsor and External Management in light of the financial crisis. We find that the results
here are somehow different from those on leverage. In particular, the interaction terms of PFC
and Sponsor are no longer important. Instead, the interaction terms of PFC and ExternalManagement significantly affect debt maturity. Thus, Table 5 seems to suggest that Sponsor andExternal Management do affect how much a REIT can borrow. Table 6, at the same time,suggests that conditioning on the amount a REIT can borrow, Sponsor may not but ExternalManagement may play a role on how long that REIT can borrow. Column two also indicates that
the Market-to-Book ratio, and Cash Flow Volatility affect the debt maturity. Country fixed

15

Among others, see Reserve Bank of Australia (2012), Ellis (2013), Leung et al. (2013), Shi et al. (2014) for
related discussion.
16
Among others, see Monetary Authority of Singapore (2013), Shirai (2014) and the reference therein for more
related discussion.
17
See also Obstfeld (2014), among others, which provides a detailed analysis of the limited effect of government
policies in emerging market economies in the face of global financial crises.

18

effects do not matter. Column three and four report the results under the Instrumental Variable(IV) approach, which are similar.
In unreported robustness tests, we also reexamine the relationship between debt
financing and Sponsor and External Management with different measures of the dependent
variables. We measure leverage alternatively by market leverage, measured as total book debt
divided by (total assets minus book equity plus market equity). We alternatively measure debt
maturity as the ratio of long-term debt to total debt. Of the control variables, we include different
combinations of the explanatory variables as controls in specification (1) and (2). Our findings
remain qualitatively unchanged with these alternative model specifications and measures.

V.

CONCLUDING REMARKS
Debt financing decisions are some of the most important for REITs given the lack ofinternal cash flows and high dividend distributions. In this study, we specifically highlight thedistinctive and unique characteristics of Asian-Pacific REITs, namely sponsorship and externalmanagement. We show that the presence of a sponsor enables REITs to engage in moreaggressive debt financing practices with higher leverage and loans with longer maturity. We also
show externally managed REITs to be less competitive in the debt market, as evident with lower
leverage and loans with shorter maturity. Other things being equal, we find that lenders havebecome more cautious about REIT borrowing subsequent to the financial crisis and that theexistence of a sponsor becomes less effective at helping REITs to secure debt financing .
Leverage is also substantially lower for externally managed REIT in the post crisis period. Thus,
it may be more difficult to channel capital into the Asian-Pacific REIT markets. As the degree of19

urbanization in Asian-Pacific region has yet caught up with the Western countries, there is an
expectation that the development of REIT markets could enhance the urbanization process andeconomic development.18 Our study suggests that the financial crisis could have a negative effecton the development of the REIT markets in the region. Clearly, this is an important topic andmore research efforts are needed.
Future research should explore how the global financial crisis might have changed thefinancing and capital structure of Asian firms. The current study focuses on REITs, which arerequired to distribute most of the profit in the form of dividend in many countries. For generalstocks, this requirement is absent and hence firms could adjust in the margin of dividend
distribution. Banks can also reallocate the loans to different types of firms after the global
financial crisis; especially many financial reforms have taken place. In addition, the global
financial crisis also leads major central banks to adopt unconventional monetary policies at least
for a few years. Those policies can have important consequences to different asset markets.19 The
resulting equilibrium would be interesting to explore.

Acknowledgement:
We are grateful to Paul Anglin, Robert Edelstein, Yuichiro Kawaguchi, Rose Lai, Tim
Riddiough, Xueping Wu, and especially an anonymous referee for valuable comments, and City
University of Hong Kong for financial support. The views expressed here are from the authorsand do not necessarily reflect the affiliated institutions. The usual disclaimer applies.

18

Among others, see Packer et al. (2013), Malpezzi (2012) for related discussion.
Clearly, the literature is too large to be reviewed here. Among others, see Leung and Tang (2012), Leung et al.
(2013), Roache and Rousset (2013), Rogers et al. (2014).
19

20

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25

Table 1: Descriptive Statistics
Variable

MeanStandard
Deviation

Q25

Dependent Variables
Leverage
0.38
0.13
0.30
Debt Maturity
2.82
0.75
2.52
Asia-Pacific Specific Factors
Sponsor
0.53
0.50
0.00
External Management
0.88
0.32
1.00
Firm & Financial Variables
Market-to-Book
0.92
0.22
0.75
Firm Size
21.18
0.71
20.68
Profitability (ROA)
3.74
5.02
1.92
Cash Flow Volatility
2.88
8.88
0.01
Earnings Growth
0.05
0.17
-0.01
Market Access
0.60
0.49
0.00
Asset Maturity
2.15
1.55
0.94
Asset Liquidity
2.55
1.10
2.00
Firm Age (Years)
4.49
1.97
2.96
No. of161
Observations
This table presents the summary statistics of the total sample.

Median

Q75

0.37
2.99

0.46
3.46

1.00
1.00

1.00
1.00

0.88
21.17
3.08
0.02
0.01
1.00
1.82
2.00
4.29

1.07
21.58
6.83
14.12
0.05
1.00
2.56
3.00
5.64

26

Table 2: Descriptive Statistics with Sponsor and External Management
VariableSponsorWithout
Sponsort-testdifference

Internal
Management

External
Managementt-testdifference

Dependent Variables
4.70***
4.56***
Leverage
0.43
0.34
0.50
0.36
0.42
1.06
Debt Maturity
2.84
2.79
2.96
2.80
Firm & Financial Variables
-0.87
-1.57
0.85
0.93
Market-to-Book
0.91
0.94
-2.05**-3.00***
Firm Size
21.07
21.30
20.73
21.24
Profitability
5.10
2.22
1.50
4.04
3.79***-2.09**(ROA)
Cash Flow
1.21
0.50
Volatility
2.68
1.99
1.85
1.75
-0.73
4.19***
Earnings Growth
0.04
0.06
0.20
0.03
0.10
-2.17**
Market Access
0.60
0.59
0.37
0.63
1.41
6.02***
Asset Maturity
2.32
1.97
3.98
1.91
3.98***-0.31
Asset Liquidity
2.85
2.19
2.47
2.55
-0.10
0.14
Firm Age (Years)
4.47
4.50
4.55
4.48
No. ofObservations
85
76
19
142
This table shows summary statistics of the subsample groups with and without sponsor, and internalversus external management. *** 1% significance; ** 5% significance.

27

Table 3: The Impact of Sponsor and External Management on Leverage (GLS and IV Approach)
Variable

Dependent variable: leverage
GLS

Constant

Instrumental Variable Approach-0.04***-0.01-0.04***-0.01(0.00)(0.22)(0.00)(0.24)

1.17***

1.02***

1.07***

1.03***(0.00)(0.00)(0.00)(0.00)

External Management -0.76***-0.76***-0.64***-0.91***(0.00)(0.00)(0.00)(0.00)-0.01***-0.01(0.00)(0.17)

Sponsor

Debt Maturity

Market-to-Book

Firm Size

Profitability(ROA)

Cash Flow Volatility

Market Access

Asset Liquidity

Firm Age

Australia

Singapore

-0.01

0.01

(0.95)(0.43)

0.02

0.02(0.33)(0.30)-0.01***-0.01***(0.00)(0.00)

0.01**

0.01**(0.02)(0.01)

1.78***

1.93***(0.00)(0.00)-0.92***-0.98***(0.00)(0.00)

0.01**

0.01**(0.04)(0.04)

0.01

0.01

0.01

0.01

(0.56)(0.62)(0.46)(0.61)

-0.00

0.00

0.00

0.00

(1.00)(0.76)(0.24)(0.78)

28

Year
Wald chi2

yes

yes

yes

yes

68.12***

65071.81***180.50***206.07***This table presents regression results on the total sample of 161 observations. *** 1%
significance; ** 5% significance; * 10% significance.

29

Table 4: The Impact of Sponsor and External Management on Debt Maturity (GLS and IV Approach)
Variable

Dependent variable: debt maturity
GLS

Constant

SponsorExternal Management

Instrumental Variable Approach-0.19***-0.01-0.18***-0.00(0.00)(0.66)(0.00)(0.87)

0.93***

0.87***

0.90***

0.82***(0.00)(0.00)(0.00)(0.00)-0.19-0.99***-0.37-0.89***(0.82)(0.00)(0.69)(0.00)-0.45-0.57**(0.11)(0.04)

LeverageMarket-to-Book

Size

Size square

Cash Flow Volatility

Earnings GrowthMarket Access

Asset Maturity

Asset Liquidity

Firm Age

0.35***

0.38***(0.00)(0.00)

0.21

-0.31

(0.93)(0.89)

-0.01

0.01

(0.96)(0.88)

0.01

0.01(0.46)(0.50)

-0.07

-0.12

(0.51)(0.21)

1.06***

1.00***(0.00)(0.00)

0.01

0.01(0.50)(0.31)-0.62***-0.59***(0.00)(0.00)

-0.01

0.01

(0.82)(0.63)

30

Australia

SingaporeYear
Wald chi2

-0.01

-0.02

-0.01

-0.01

(0.58)(0.65)(0.59)(0.66)

-0.02

-0.01

-0.02

-0.01

(0.24)(0.50)(0.24)(0.40)

yes

yes

yes

yes

69.10***

162.90***71.23***

192.07***This table presents regression results on the total sample of 161 observations. *** 1%
significance; ** 5% significance; * 10% significance.

31

Table 5: The Impact of Sponsor and External Management on Leverage Subsequent to Financial Crisis(GLS and Instrumental Variable Approach)
Variable

Dependent variable: leverage
GLS

Constant

Instrumental Variable Approach-0.01

0.05***-0.01

0.04***(0.98)(0.00)(0.73)(0.01)

0.26*

0.80*

0.26*

0.71*

(0.09)(0.07)(0.08)(0.09)

-0.05

-0.06

-0.01

-0.07

(0.47)(0.70)(0.94)(0.67)

Post Financial Crisis (PFC) -0.08***-0.01-0.08***-0.02**(0.00)(0.96)(0.00)(0.04)-0.02-0.01**-0.02***-0.02***(0.15)(0.05)(0.00)(0.00)PFC*External Management -0.08***-0.08***-0.08***-0.08***(0.00)(0.00)(0.00)(0.00)-0.01***-0.01**(0.00)(0.01)

SponsorExternal Management

PFC*Sponsor

Debt Maturity

Market-to-Book

Size

Profitability(ROA)

Cash Flow Volatility

Market Access

0.01

0.01

(0.72)(0.74)

0.02

0.01(0.33)(0.89)-0.01-0.01**(0.10)(0.04)

0.01***

0.01***(0.00)(0.00)

0.92***

0.71**(0.00)(0.03)

32

Asset Liquidity

Firm Age

Australia

Singapore

Wald chi2-0.37*-0.28(0.06)(0.17)

0.01

0.01*

(0.19)(0.10)-0.03*-0.04**-0.03*-0.03**(0.10)(0.03)(0.09)(0.04)

0.01***

0.01

0.01***

0.01**(0.00)(0.42)(0.00)(0.02)

42.38***

65.20***

56.67***

105.68***This table presents regression results on the total sample of 161 observations. *** 1%
significance; ** 5% significance; * 10% significance.

33

Table 6: The Impact of Sponsor and External Management on Debt Maturity Subsequent to the Financial
Crisis (GLS and Instrumental Variable Approach)
Variable

Dependent variable: debt maturity
GLS

Constant

Instrumental Variable Approach

0.03

0.29***

0.02

0.28***(0.39)(0.00)(0.50)(0.00)

0.12

0.69***

0.07

0.63***(0.83)(0.00)(0.90)(0.00)-0.78-0.79***-0.60***-0.64(0.17)(0.00)(0.01)(0.25)

Post Financial Crisis (PFC) -0.17***-0.64***-0.12*-0.61***(0.01)(0.00)(0.07)(0.00)

-0.01

-0.02

-0.03

-0.02

(0.80)(0.38)(0.38)(0.29)

0.16***

0.17*

0.12**

0.16*(0.01)(0.06)(0.05)(0.07)-0.96***-0.71**(0.00)(0.01)

SponsorExternal Management

PFC*Sponsor

PFC*External management

LeverageMarket-to-Book

Size

Size square

Cash Flow Volatility

Earnings Growth

0.42***

0.40***(0.00)(0.00)

-0.26

-0.70

(0.92)(0.76)

0.01

0.02(0.88)(0.74)

0.04***

0.04***(0.00)(0.00)

-0.13

-0.14

(0.27)(0.22)

34

Market Access

Asset Maturity

Asset Liquidity

Firm Age

Australia

Singapore

Wald chi2

-0.65

-0.10

(0.68)(0.95)

0.02

0.01(0.26)(0.48)

1.18

0.74(0.22)(0.42)

0.02

0.03**(0.13)(0.03)

0.06

0.08

0.05

0.09

(0.20)(0.22)(0.25)(0.15)

-0.03

-0.01

-0.02

-0.01

(0.23)(0.63)(0.57)(0.68)

20.78***

333.99***36.22***

377.88***This table presents regression results on the total sample of 161 observations. *** 1%
significance; ** 5% significance; * 10% significance.

35