Application of the Fama-French Model to Singapore REITs

Abstract

The paper applies the Fama French 3-factor Model to Singapore REITs’ market to determine if the model has strong explanatory power on Singapore REITs’ excess return over a 11-year period from 2009-2019. Several previous studies have illustrated that the Fama French Model has superior predictive power as compared to the traditional Capital Asset Pricing Model (CAPM) in many stock markets worldwide. Over the past 2 decades, the Singaporean REIT market has grown significantly, with over 34 S-REITS with a total market capitalization of around S$107 billion, and is increasingly becoming one of Asia’s global REIT hubs.

We have utilised existing Fama French factors for APAC region stock markets (except Japan) to conduct a series of multivariate regressions. Specifically, the study has implemented longitudinal and cross-sectional regressions over four stages for a period of 11 years, testing the efficacy of the Fama French 3-Factor Model for the statistical significance of Market Risk Premium, Size and Value Premiums for both single REITs and REIT portfolios in Singapore from 2009 to 2019.

Our results indicate that the Fama French factors have exhibited strong statistical significance in capturing and accounting for Singapore REITs’ excess returns. Factors of market risk premium, size and book-to-market value factors are proven to have significant explanatory power over excess return. Our main finding contrary to the existing application of Fama French 3-Factor model is the presence of a negative SMB coefficient which constitutes a reversal of the “size effect”. Further, we have also found the presence of REITs’ own-volatility (including unique firm-specific risk and systematic market risk) as a statistically significant factor, and the absence of Carhart’s momentum factor in the Singapore Stock Market. We have attempted to propose several plausible explanations, together with an in-depth analysis and review on existing literature for the reverse size premium effect, own-volatility factor and the absence of momentum factor in Singapore Stock Market.

In summary, the Fama French 3-Factor model is successful with strong explanatory power in accounting for excess returns across entire time periods and individual sub-time periods for Singapore REITs over a 11-year period from 2009 to 2019.