Are there efficiency gains for larger Asian REITS?

Purpose – The purpose of this study is to test whether real estate investment trusts (REITs) are able to reap positive economies of scale with an enlarged asset base, which are translated into lower operating expenses, higher revenue, and better accessibility to capital at competitive costs. The paper aims to test economies of scale effects on expenses, revenue and equity return for REITs in Asia over a sample period from 2001 to 2007. Design/methodology/approach Three different functional models are used (translog, semilog quadratic and simple quadratic) to test the relations of asset size and squared asset size of REITs with expense variables. Findings The semilog quadratic models show significant positive economies of scale effects in all expenses categories except for property management fees after controlling for exogenous factors like country, year, diversification strategy and growth. The paper does not, however, find significant scale advantages in revenue, operating income and equity costs for larger Asian REITs. Research limitations/implications This paper acknowledges the limitations associated with small sample size, and possible inconsistency in the financial reporting of expenses and revenues data in the sample countries, which may cause some biases in the results. The findings imply that REIT asset managers should focus on asset growth strategies that are able to generate scale efficiency, so as to generate positive wealth effects for shareholders. Originality/value Past empirical research on scale economies focuses on US REITs. There are limited works done on the emerging Asia REIT markets. This study helps fill the gap by establishing whether there exists significant scale efficiency in operation and performance of Asian REITs.