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CHAPTER 1

INTRODUCTION

In this chapter, the problem and its background and the statement of the problem are

introduced. It also includes discussions on the hypotheses, significance of the study, scope and

delimitation, and the operational definition of terms.

The Problem and Its Background

"Make your money work for you" is a principle that Robert Kiyosaki and many other investors

promote (Munster, 2022). This involves investing in assets that will grow (Security Bank, 2022). Sweta

(2023). Defines investing as allocating resources, generally money, to make a profit. It includes buying

assets intended to appreciate or create income from interest, dividends, or rent, that aims to achieve

financial security and growth. Moreover, " While money doesn’t grow on trees, it can grow when you

save and invest wisely," (COMMISION) which is why intelligent investment choices are essential

(United States Securities and Exchange Commission, n.d.a). In addition, investing increases wealth

over time; protects us against from inflation, and helps individuals save for retirement, college, and

even other long-term financial goals (Blume, 2021).

Additionally, every reasonable investor wants to maximize investment returns and reduce

investment risk (Leković, 2018). However, investing is risky and requires investigation and expert

counsel before one makes financial decisions (Consumer Financial Protection Bureau, n.d.). Due to

uncertainty and potential future risk, Bhutto et al. (2020) recommend the diversification of investment

strategy for modern investors because diversifying their holdings rather than concentrating their

investments in a single type of security reduces risk and generates higher returns compared to other

investment strategies Bhutto et al. (2020) also mention that investing in equities, bonds, real estate,

and other asset types diversifies. It also needs to choose assets with varying risks and locations.

Droms (n.d.) calls this mix of investments "asset allocation,” which is the first and most essential

decision in investment. Droms (n.d.) also argued that gold and real estate hedge against hyperinflation
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best when diversifying holdings. He and several financial experts stressed that real estate provides

higher long-term returns than gold. However, it is also important to note that diversification benefits

increase with decreased correlation. This means diversification works better, portfolio risk is reduced

when assets are less correlated (Welu, 2021).

Also, investing can come in many forms, such as stocks, bonds, mutual funds, commodities, or

derivatives (Texas State Auditor’s Office, 2016). Stocks, also called equities, indicate company

ownership and are the most common and straightforward investment (Welu, 2021). Bonds, on the other

hand, are loans to a government, municipality, or corporation. While MUTUAL FUNDS AND INDEX

FUNDS produce a pool of money from many investors they invest the funds in numerous firms,

commodities or derivatives. On the other hand, stipulate a future asset sale price, and investors that

buy derivatives wager that the value will not drop (Money Helper, n.d.).

Moreover, those willing to take the necessary risks can make much money by investing in

stocks. Investors have the best chance of increasing money with stocks, especially in the long run

(United States. Securities and Exchange Commission, n.d.b.). Although the stock market is riskier than

real estate, Siegel (n.d.) argued that it could also make one more money. On the contrary, real estate

investment has been and will continue to be a reliable investment tool in times of crisis. It offers

protection. It generates value over time. It is passed along from generation to generation. Admittedly,

not everyone has the financial means to participate in the real estate industry because of the high

cost of entry. Only people who can afford to invest vast sums tend to dominate it (Pinnacle, n.d.).

Fortunately, investors can now invest in real estate without owning it through a new investment

instrument, the real estate investment trusts (REITs). These companies manages revenue-generating

properties - including malls, hotels, and office buildings - and delivers rental income to stockholders as

dividends. Compared to direct property ownership, real estate investment trusts (REITs) provide real

estate investments with lesser financial and management needs. Apart from high dividend yields,

liquidity, and diversity are some benefits of REITs (Beltran, 2022). REITs were created in 1961 in the

United States as an alternative to direct real estate investing. The initial legislative objective was that
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REITs would be inclusive and allow all residents to profit from investing in high-quality commercial real

estate without actually buying commercial real estate. Legally, these companies must pay at least 90%

of their profits in dividends, making them a key source of income for investors. Thus, REITs allow

investors to include real estate in their portfolios and may pay greater dividend rates (U.S. SEC, n.d.b.).

However, the Philippine REIT sector has just started, even though the law governing REITs was

established over a decade ago. REITs were established in the Philippines in 2009 but became popular

in 2020 because of regulatory improvements and investor demand (Sallan & Gemida, 2022).

So, despite the expanding number of REITs globally, there is still plenty of need to study this

relatively new security, especially in the Philippine REIT market (Sallan & Gemida, 2022). Moreover,

recognizing the scarcity of REIT research in developing countries cause consumers to doubt these

assets. Since an information comes from well-established international REITs businesses, the

perceptions and performance of REITs from Asian and developing countries are speculative (Victor &

Razali, 2019). Notably, diversification is best achieved with less correlated assets. Moreover, since data

regarding the correlation between the Philippine REITs and the PSEi is not available and related

studies abroad are contradicting, this research is geared towards addressing this knowledge gap.

Statement of the Problem

This study generally aims to identify the relationship and degree of correlation between

investments. Prospective investors may use these information in deciding whether it is advisable to

invest in REITs or stocks because diversification works better and portfolio risk is reduced when assets

are less correlated. Thus, we determined the answers to the following research questions:

1. What are the average daily closing prices of the PSEI or Philippine Stock Exchange Index?

2. What are the average daily closing prices of the following REIT companies:

(a) Ayala Land REIT (AREIT), (b) DoubleDragon Properties REIT (DDMPR), (c)

Filinvest REIT (FILRT), (d) Robinsons Land Commercial REIT (RCR), (e)

Megaworld REIT (MREIT)

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3. Is there a significant relationship between the average closing prices of the PSEi and the

average closing prices of the following REIT companies:

(f) Ayala Land REIT (AREIT),(g) DoubleDragon Properties REIT (DDMPR), (h) Filinvest

REIT (FILRT), (i) Robinsons Land Commercial REIT (RCR), (j) Megaworld REIT (MREIT)

4. How much of the variations in REITs are due to the price movement in PSEi for the following

companies:

a) Ayala Land REIT (AREIT), (b) DoubleDragon Properties REIT (DDMPR), (c) Filinvest

REIT (FILRT), (d) Robinsons Land Commercial REIT (RCR), (e) Megaworld REIT

(MREIT)

Hypotheses

Hypotheses in real estate investment trusts research encompass market efficiency,

macroeconomic influences on real estate prices, random walk behavior, and various financial and

investment-related aspects of REITs.

H01: There is no significant relationship between the average closing prices of the PSEi and the

average closing prices of REIT companies.

Ha1: There is a significant relationship between the average closing prices of the PSEi and the average

closing prices of REIT companies.

H02: The price movement in PSEi does not significantly influence the variability of prices in REITs.

Ha2: The price movement in PSEi significantly influences the variability of prices in REITs.

Significance of the Study

This research will contribute essential information to investors and the larger financial industry.

Moreover, its purpose is to provide crucial information and knowledge regarding the topic under study

and its importance to the following individuals:

1. Investment Managers: This research may give investment managers enough information to

understand market trends, different sectors' performance, and each stock's performance. This
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information can be used to inform investment strategies and asset allocation decisions. In

addition, it can be essential for Investment Managers in achieving superior investment returns

and meeting performance targets (Capital Market Authority, n.d.).

2. Investors: The Investors may benefit from this study since knowing the correlation between

PSEi and REITs will help them diversify their portfolios, reduce their exposure to market risks,

and potentially give them better returns. Furthermore, investors may assess whether they are

performing better or worse than the market and change their investment strategies as needed.

They can use information in this study to identify stocks likely to perform well in a particular

market environment and avoid those likely to underperform (de Langhe et al., 2016).

3. Financial Advisers: Financial advisers amy benefit from this study as it provides essential

insights into the behavior of the Philippine stock market, which can help them provide practical

investment advice and risk management strategies to their clients. This information can also be

used to develop investment strategies tailored to their client’s specific needs and risk tolerance.

Moreover, financial advisers can use the PSEi as a benchmark for evaluating the performance

of their client’s investment portfolios.

Scope and Delimitation

The variables considered in this study are the daily closing prices of five REITs, namely,

(AREIT, DDMPR, FILRT, RCR, and MREIT) and the PSEi. More specifically, we will identify the

relationship between these two investments and, the degree of correlation between the two.

Additionally, we will only be analyzing a year’s worth of daily closing prices from the date the REIT

company became publicly listed and relate it to the corresponding date in the PSEi.

Operational Definition of Terms

To understand this study better, the following terms, which are extensively used in this study

and should be interpreted according to their operational definition given in this section:

 Philippine Stock Exchange Index (PSEi): It is a stock market index that measures the performance

of the 30 largest companies, chosen for their ability to represent the general movement of the
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Philippine stock market (Earnest, 2021). However, in this study, we refer to a year-worth of prices of

PSEi at the end of each trading day from the start of the public listing of the following companies:

AREIT, DDMPR, FILRT, RCR, and MREIT.

 Real Estate Investment Trusts (REITs): Are companies that own, manage, or finance real estate

properties. However this study pertains to the prices of AREIT, DDMPR, FILRT, RCR, and MREIT

at the end of each trading day since the start of their public listing.
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