Can experts' ratings predict the future performance of real estate investment trusts : empirical evidence from Hong Kong

Abstract

This study investigates whether the opinions of Real Estate Investment Trusts (REITs) experts can predict future REITs performance. The efficient market hypothesis (EMH) suggests that all publicly available information is already reflected in asset prices, making it impossible to predict future price movements. However, the validity of this hypothesis may be challenged as different market participants may interpret public information differently, and expert knowledge may play a role in predicting asset prices. To test this hypothesis, the study identifies factors that influence REITs performance, which can be measured from publicly available information such as REITs annual reports and government websites. These factors are combined using a REITs rating scoring framework to create an Unweighted Total Score (UTS). To account for the varying importance of these factors, the study incorporates weights from REITs experts using the Analytical Hierarchy Process (AHP). This produces a Weighted Total Score (WTS) that combines public information and expert knowledge. The study then uses the UTS and WTS to predict future REITs performance using data from the Hong Kong REITs market. Five performance measures are considered: Excess Return Over Market-Wide REITs Return (RELSHARE), Treynor Ratio (TREYNOR), Sharpe Ratio (SHARPE), Jensen’s Alpha (ALPHA), and Tobin’s Q (TOBIN_Q). The empirical results demonstrate that both the UTS and WTS can predict future REITs performance measures, which reject the EMH. Compared to common stocks, REITs are required to disclose more information to investors, indicating a greater availability of public information in the REITs market. The rejection of the EMH with REITs market data raises doubts about its validity in the stock market. Furthermore, the study finds that the WTS outperforms the UTS in predicting all REITs performance measures. Among the REITs experts, analysts' opinions are most effective in predicting short-term performance measures that do not consider all risks (RELSHARE and TREYNOR), suggesting a greater risk appetite and focus on short-term returns. In contrast, investors' opinions are more useful in predicting total risk-adjusted returns (SHARPE) and longer-term performance measures (ALPHA and TOBIN_Q), indicating a less risk-taking approach and longer investment horizons. The opinions of REITs managers, who specialize in managing physical assets rather than maximizing financial gains, are not as effective as those of analysts and investors in predicting REITs performance. The UTS and WTS derived from this study can provide valuable insights for practitioners and individual investors in the Hong Kong REITs market, helping them make more informed investment decisions. This approach can also be applied to examine the impact of UTS and WTS on future REITs performance in REITs markets worldwide.