The effect of capital structure on the profitability of listed real estate invesment trusts (reits) in the United Kingdom from 2007 to 2014

THE EFFECT OF CAPITAL STRUCTURE ON

THE PROFITABILITY OF LISTED REAL

ESTATE INVESTMENT TRUSTS (REITS) IN

THE UNITED KINGDOM FROM 2007 TO 2014

By

TRAN VU DANG

Supervised by

Pamela Anderson

A dissertation submitted for the award of the degree of

Master of Finance

The University of Huddersfield

September 2015

i

ABSTRACT

The regulation for real estate investment trusts (REITs) in United Kingdom is

introduced in January 2007 with the expectation that the REITs will be the solution for

the scarcity of reasonably priced rental housing in UK and so many listed property firms

in UK chose to become REITs (Leone, 2011; Park, 2009). Many property companies have

chosen to convert to REITs or many new REITs have been established since 2007. The

objective of this study is to analyse the effect of capital structure on the profitability of

listed Real Estate Investment Trusts (REITs) in United Kingdom from 2007 to 2014.

A sample of 15 REITs in United Kingdom from 2007 to 2014 has been collected

from the database Osiris, which is the database provided by University of Huddersfield.

Short-term debt ratio, long-term debt ratio and total debt ratio will be used as the

indicators of capital structure of REITs in United Kingdom. Return on asset and return

on equity will be used as the indicators of profitability of REITs in United Kingdom.

This study finds out that there is a significant and negative effect of long-term

debt ratio and total debt ratio on return on asset of REITs in United Kingdom. There is

the negative effect of short-term debt ratio on return on asset; however, this effect is

insignificant. In addition, it also finds out that there is a significant and negative effect of

short-term debt ratio, long-term debt ratio and total debt ratio on return on equity of REITs

in United Kingdom. These results may indicates that REITs in United Kingdom should

use lest debt by reducing either short-term debt or long-term debt in order to increase their

profitability.

ii

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my supervisor Pamela Anderson

for her guidance, patience, motivation, and most importantly, her immense knowledge.

Her support in the learning sets helped me in all the time of research and writing of this

dissertation. I could not have imagined having a better supervisor for my master study.

I would also like to thank Kay Smith for her comments in the learning sets. Her

comments has contributed a lot to the writing of this dissertation. Finally, I would like to

thank the Business School, University of Huddersfield has supplied the research resources

like the Osiris database and the learning sets, which have helped me a lot in finishing this

dissertation.

iii

TABLE OF CONTENTS

ABSTRACT.......................................................................................................................i

ACKNOWLEDGEMENT ................................................................................................ ii

LIST OF TABLES .......................................................................................................... vii

LIST OF FIGURES ....................................................................................................... viii

LIST OF ABBREVIATIONS.......................................................................................... ix

CHAPTER ONE: INTRODUCTION..................................................................... 1

1.1. Background of the study.........................................................................................1

1.2. Research aims and objectives.................................................................................4

1.3. Structure of the study .............................................................................................4

CHAPTER TWO: LITERATURE REVIEW......................................................... 5

2.1. Introduction ............................................................................................................5

2.2. The legislation of the Real Estate Investment Trusts (REITs) industry in United

Kingdom........................................................................................................................5

2.3. Profitability of Real Estate Investment Trusts (REITs) in United Kingdom .........6

2.3.1. Previous studies about the indicators of profitability of Real Estate

Investment Trusts (REITs)....................................................................................6

2.3.2. Explanation of the choice return on asset (ROA) and Return on Equity

(ROE) as indicators of profitability of Real Estate Investment Trusts (REITs) in

United Kingdom....................................................................................................7

2.4. Capital structure of Real Estate Investment Trusts (REITs) in United Kingdom ..8

2.4.1. Theories on capital structure of Real Estate Investment Trusts (REITs)....8

2.4.2. Explanation of the choice of short-term debt ratio (STDR) and long-term

debt ratio (LTDR) and total debt ratio (TDR) as indicators of capital structure of

Real Estate Investment Trusts (REITs) in United Kingdom...............................10

2.5. Previous studies on the relationship between short-term debt ratio (STDR) and

profitability of Real Estate Investment Trusts (REITs)...............................................12

2.5.1. Previous studies about the indicators of short-term debt ratio (STDR) ....12

2.5.2 Previous studies about the relationship between short-term debt ratio

(STDR) on the return on asset (ROA).................................................................12

2.5.3. Previous studies about the relationship between short-term debt ratio

(STDR) and return on equity (ROE)...................................................................13

iv

2.6. Long term debt ratio (LTDR)...............................................................................14

2.6.1. Previous studies about the indicators of long-term debt ratio (LTDR) of

Real Estate Investment Trusts (REITs)...............................................................14

2.6.2. Previous studies about the relationship between long-term debt ratio

(LTDR) and return on asset (ROA).....................................................................14

2.6.3. Previous studies about the relationship between long-term debt ratio

(LTDR) and return on equity (ROE)...................................................................15

2.7. Total debt ratio (TDR) .............................................................................................16

2.7.1. Previous studies about the indicators of total debt ratio (TDR)................16

2.7.2. Previous studies about the relationship between total debt ratio (TDR) and

the return on asset (ROA)....................................................................................17

2.7.3. Previous studies about the relationship between total debt ratio (TDR) and

return on equity (ROE)........................................................................................18

2.8. Size as control variable.........................................................................................19

2.8.1. Explanation of choosing size as control variable ......................................19

2.8.2. Previous studies about the indicator of size of Real Estate Investment

Trusts (REITs).....................................................................................................20

2.8.3. Previous studies about the relationship of size and return on asset (ROA)

.............................................................................................................................20

2.8.4. Previous studies about the relationship between size and return on equity

(ROE) ..................................................................................................................21

2.9. Conclusion............................................................................................................21

CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY................ 22

3.1. Introduction ..........................................................................................................22

3.2. Research objectives and questions .......................................................................22

3.3. Research approach................................................................................................22

3.4. Sample selection...................................................................................................23

3.5. Data collection methods.......................................................................................23

3.6. Data analysis.........................................................................................................24

3.6.1. Definition and measurement of variables..................................................24

3.6.2. Descriptive statistics..................................................................................25

3.6.3. Correlation coefficients.............................................................................26

3.6.4. Multicollinearity........................................................................................26

3.6.5. Multivariate linear regression....................................................................27

v

3.7. Hypothesis development ......................................................................................28

3.8. Conclusion............................................................................................................29

CHAPTER FOUR: DATA ANALYSIS AND DISCUSSION................................ 30

4.1. Introduction ..........................................................................................................30

4.2. Descriptive statistics.............................................................................................30

4.2.1. Descriptive statistics of return on asset (ROA) and return on equity (ROE)

.............................................................................................................................31

4.2.2. Descriptive statistics of short-term debt ratio (STDR), long-term debt ratio

(LTDR) and total debt ratio (TDR).....................................................................33

4.2.3. Descriptive statistics of size ......................................................................37

4.3. Results of correlation and expected relationship between capital structure and

profitability of Real Estate Investment Trusts (REITs) in United Kingdom...............38

4.3.1. Expected relationship between the indicators of capital structure and

return on asset as the indicator of profitability of Real Estate Investment Trusts

(REITs) in the United Kingdom..........................................................................39

4.3.2. Expected relationship between the indicators of capital structure and

return on equity (ROE) as the indicator of profitability of Real Estate Investment

Trusts (REITs) in United Kingdom.....................................................................39

4.4. Regression analysis and discussion of the effect of short-term debt ratio (STDR)

on the profitability of Real Estate Investment Trusts (REITs) in United Kingdom....39

4.4.1. Effects of short term debt ratio (STDR) on profitability of on return on

asset (ROA).........................................................................................................39

4.4.2. Effect of short-term debt ratio (STDR) on return on equity (ROE)..........42

4.5. Effects of long-term debt ratio (LTDR) on profitability of Real Estate Investment

Trusts (REITs) in United Kingdom.............................................................................45

4.5.1. Effect of long- term debt ratio (LTDR) on return on asset (ROA) ...........45

4.5.2. Effect of long-term debt ratio (LTDR) on return on equity (ROE) ..........48

4.6. Effects of total debt ratio on profitability of Real Estate Investment Trusts

(REITs) in United Kingdom........................................................................................51

4.6.1. Effect of total debt ratio (TDR) on return on asset (ROA) ...............................51

4.6.2. Effect of total debt ratio (TDR) on return on equity (ROE)......................53

4.7. Size as control variable.........................................................................................56

4.7.1. Relationship between size and return on asset (ROA)..............................56

4.7.2. Relationship between size return on equity (ROE)...................................57

4.8. Hypothesis outcome .............................................................................................57

vi

4.9. Conclusion............................................................................................................58

CHAPTER FIVE: RECOMMENDATIONS AND CONCLUSIONS ................... 60

5.1. Introduction ..........................................................................................................60

5.2. Summary of the study...........................................................................................60

5.3. Limitations of the study........................................................................................62

5.4. Recommendations for future studies....................................................................62

REFERENCE....................................................................................................... 64

APPENDICES...................................................................................................... 70

Appendix 1: Table of 40 listed REITs in UK from Osiris database............................70

Appendix 2: Table of 28 listed REITs in UK chosen for the check of date of

becoming REITs in UK...............................................................................................72

Appendix 3: Table of 15 listed REITs in UK chosen for the study ............................73

Appendix 4: Table of explanation of how the variable is collected and calculated ....74

Appendix 5: Table of raw data collected from Osiris .................................................75

Appendix 6: Table of the calculated data of variables used in the study ....................75

vii

LIST OF TABLES

Table 4.1: Descriptive statistics of dependent and independent variables .................... 30

Table 4.2: Correlations between independent variables and dependent variables......... 38

Table 4.3: Summary of model 1 .................................................................................... 40

Table 4.4: ANOVA of model 1 ..................................................................................... 40

Table 4.5: Result of the regression model 1................................................................... 41

Table 4.6: Summary of model 2..................................................................................... 42

Table 4.7: ANOVA of model 2...................................................................................... 43

Table 4.8: Result of the regression model 2 .................................................................. 44

Table 4.9: Summary of model 3..................................................................................... 45

Table 4.10: ANOVA of model 3.................................................................................... 46

Table 4.11: Result of the regression model 3 ................................................................ 47

Table 4.12: Summary of model 4................................................................................... 48

Table 4.13: ANOVA of model 4.................................................................................... 49

Table 4.14: Result of the regression model 4................................................................. 50

Table 4.15: Summary of model 5................................................................................... 51

Table 4.16: ANOVA of model 5.................................................................................... 51

Table 4.17: Result of the regression model 5 ................................................................ 52

Table 4.18: Summary of model 6................................................................................... 54

Table 4.19: ANOVA of model 6.................................................................................... 54

Table 4.20: Result of the regression model 6 ................................................................ 55

Table 4.21: Hypothesis outcome.................................................................................... 57