A-REIT rights issues

Purpose – This is the first REIT paper to seek to empirically examine potential influencing factors on the discounts and underwriting fees of Australian REIT rights issues.

Design/methodology/approach – Using a methodology similar to Owen and Suchard, and Armitage, a sample of 62 A-REIT rights issues during 2001-2009 is analyzed. A variety of potential factors influencing discounts and underwriting fees are explored.

Findings – Over A$20 billion was raised by A-REIT rights issues during 2001-2009 (this around three times that raised through A-REIT initial public offerings during the same period). The mean offer price was discounted around 9.5 percent from the current market price and underwriting fees averaged 2.9 percent of gross proceeds raised – both substantially less than for industrial rights issues. The standard deviation of daily returns for the past year appears to influence the percentage discount offered to subscribers. This volatility was particularly noticeable in 2008 and 2009, during the global financial crisis, where new issues were discounted substantially so as to raise equity to repay debt. This historical risk variable appears paramount in determining the discounts to subscribers and fees to underwriters.

Practical implications – A-REITs seeking to minimize the discounts offered to subscribers and to minimize their underwriting costs with rights issue equity capital raisings must first minimize their share price volatility.

Originality/value – This paper adds to the international costs of capital raising literature of REITs by examining such costs with A-REIT rights issues and is the first paper to examine factors influencing these costs.