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1. Introduction
Listed property trusts (LPTs) are some of the most successful indirect property investments in Australia. As at 31 December 2006, the total market capitalisation of Australian LPTs was approximately AUD$135 billion, representing over 12 per cent of the global listed real estate market ([6], [7] ASX, 2006a, b). Following the increasing acceptance of LPTs or REITs as an investment vehicle in other countries such as UK, factors affecting the level of risk, particularly systematic risk, in LPTs have received considerable research attention.
Previous real estate studies have generally accepted that the characteristics of LPTs have direct implications for the level of systematic risk. Such studies have employed the capital asset pricing model (CAPM) to quantify the systematic risk of a LPT (or REIT). However, using CAPM has several drawbacks, such as the assumptions that return distributions are normally distributed and utility functions are irrelevant for investors. More importantly, these assumptions have been rejected by extensive studies. Therefore, it is not surprising that there is little empirical evidence supporting CAPM in finance and real estate literature ([13] Chen et al. , 1998; [16] Conover et al. , 2000; [22] Fama and French, 1992, [23] 2004; [34] Malkiel and Xu, 1997).
In order to address these limitations, alternative measures for capturing the market-related risk of a LPT must be employed. A viable alternative is to use downside systematic risk since it has been shown that downside systematic risk is a more intuitively appealing risk measure compared to conventional risk measures ([9] Bawa and Linderberg, 1977; [29] Hogan and Warren, 1974). Reasons for acceptance of downside systematic risk as an efficient measure of risk are that it:
- does not require an assumption about the return distribution of an asset;
- is more consistent with the investor's expected utility function; and
- is a risk measure that only focuses on the downside and combines information provided by variance and skewness into one measure ([19] Estrada, 2002; [40] Nawrocki, 1999).
Recent studies have also highlighted the ability of downside systematic risk to explain return variations and offer some empirical support for downside systematic risk ([5] Ang et al. , 2006; [44] Post and Vilet, 2004).
The questions surrounding downside systematic risk in LPTs (or REITs) have...