EVALUATING THE FINANCIAL PERFORMANCE METRICS OF REAL ESTATE INVESTMENT TRUSTS: IDENTIFYING APPROPRIATE METRICS FOR INVESTMENT ANALYSIS

Abstract

This study assesses the effectiveness of commonly used financial performance metrics, return on assets (ROA), return on equity (ROE), funds from operations (FFO), and Tobin’s Q, in evaluating the financial health of real estate investment trusts (REITs) within the unique regulatory context of Malaysia, thereby identifying the most contextually relevant indicator for emerging REIT markets. The study uses a sample of 17 of the 19 listed REITS on the Malaysian Stock Exchange from 2017 to 2023 to derive a panel dataset. The study employed a static panel regression approach, utilising a two-stage least squares (2SLS) method as an estimation technique. The empirical findings demonstrate that the regression model accounts for approximately 52.4% of the variance observed in the net asset value (NAV). ROE shows a statistically significant positive effect with NAV (β = 15.657, p = 0.026), emphasising its relevance as the most appropriate financial performance indicator within this context. Tobin’s Q exhibits a statistically significant negative association with NAV. To address the issue of multicollinearity, ROA and FFO were instrumented using their predicted values. This research addresses a critical gap in existing literature by rigorously evaluating the relevance and effectiveness of conventional financial performance metrics within the unique regulatory and market context.