Turkish REICs or REDCs: Analysis of the effect of asset allocation on Return

Turkish REICs became publicly listed in Istanbul Stock Exchange (ISE) since 1997. As end of 2011Q3, twenty-three REICs are listed in ISE with a total market capitalization USD 6.9 billion and the total net asset value stands at USD 10.1 billion. The sectorís aggregate discount to its NAV stands at approximately 30%, higher than the sectorís 5-year average discount of 25%. Turkish REICs return have been volatile, partly due to extreme inflation, economic crisis over the past years. On the other hand, Turkish REICs have a distinctive asset allocation compared to other REITs in the world. The current asset structure of Turkish REICs emphasis development of their own assets, instead of having investment grade products. Currently, lands and development stage projects especially residential developments- constitute approximately half of the total Turkish REICs portfolio, while investment grade properties represent only 35% of total portfolio. Hence, Turkish companies can called íReal Estate Development Companies - REDCs instead of íReal Estate Investment Companies ñREICsî. This study examines correlation between annual return and their asset allocation of Turkish REICs, based on the assumption of ímajority of land and development stage projects in REDCs portfolio causes high risk premium due to uncertainty in potential incomeî. A number of fundamental variables that are expected to affect return are incorporated to the analysis. In addition, REICs performance are compared with REIC index (XGMYO) and Istanbul Stock Exchange index (XU100) from 1997 through 2011.