Asset Focus and Performance of J-REITs: A Comparison between Diversification and Specialization

Abstract

While diversified J-REITs that invest in multiple property sectors retain the largest share since the inception of the market, specialized J-REITs have gradually gained presence. The increasing share of specialized J-REITs could be a rational movement if we can verify their superior performance against diversified J-REITs. This research tries to compare diversified and specialized J-REITs through operational asset-focused J-REITs to determine the presence of different risk-return relationships between them using actual market data of 48 months. We choose five J-REITs from three sub-asset categories for our data analyses. From actual market data, we find no evidence of superior abnormal returns in either hotel- or healthcare-focused J-REITs vis-à-vis diversified J-REITs. For systematic risk, we find significantly lower results with respect to the three sub-asset categories, with no significant difference between them. Furthermore, we construct a simulated diversified J-REIT using five specialized J-REITs, and find that dynamic asset allocation has the potential to outperform existing diversified J-REITs. These results are not fully consistent with those in the previous studies in the United States, but they may indicate a unique phenomenon, at least in the given period, in the J-REIT market.