An analysis of the long‐run impact of fixed income and equity market performance on Australian and UK securitised property markets
| Published date | 24 April 2009 |
| Pages | 259-276 |
| Date | 24 April 2009 |
| DOI | https://doi.org/10.1108/14635780910951966 |
| Author | Chee Seng Cheong,Patrick J. Wilson,Ralf Zurbruegg |
| Subject Matter | Property management & built environment |
An analysis of the long-run
impact of fixed income and equity
market performance on
Australian and UK securitised
property markets
Chee Seng Cheong
Business School, University of Adelaide, Adelaide, Australia
Patrick J. Wilson
School of Finance and Economics, University of Technology,
Sydney, Australia, and
Ralf Zurbruegg
Business School, University of Adelaide, Adelaide, Australia
Abstract
Purpose – Given the mixed findings in the literature, this paper aims to re-examine the relationship
that the securitised property market has with both the fixed income and general stock markets in the
UK and Australia from July 1998 to June 2006.
Design/methodology/approach – The base methodology is the cointegration procedure
developed by Inoue in conjunction with the procedure developed by Johansen, Gonzalo and
Granger that allows the extraction of permanent and transitory driving factors underlying
cointegrated systems. In Australia both listed property trusts (LPTs) and real estate management and
development companies (REMDs) are studied, while in the UK the analysis is restricted to REMDs
due to the fact that real estate investment trusts were only introduced in 2007, hence providing
insufficiently long series.
Findings – The Inoue test reveals that ignoring structural breaks in any cointegrating system may
lead to erroneous inferences. In both Australia and the UK securitised property is influenced by the
general stock market in both the long- and short-term. In Australia the fixed income market does not
have a permanent influence on LPTs, despite the fact that LPTs use more long-term debt than REMDs.
Originality/value – A major contribution of this study clearly points to the relative weightings that
portfolio managers may now consider to be appropriate vis-a
´-vis their holdings of bonds, equities and
securitised property (under its different structures as considered here) in their portfolios for both their
tactical and strategic asset allocations.
Keywords Interest rates,Real estate, Stock markets, Australia,United Kingdom
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
This paper was much improved by the comments and criticisms of participants at the annual
European Real Estate Society Conference in London, 2007, the Pacific Rim Real Estate Society
Conference in Kuala Lumpur, 2008 along with two anonymous referees from Refereed Section of
that conference. The authors are grateful for this feedback.
Australian and
UK securitised
property markets
259
Received July 2008
Accepted December 2008
Journal of Property Investment &
Finance
Vol. 27 No. 3, 2009
pp. 259-276
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910951966
1. Introduction
Securitised property has been subject to intensive research over the last two decades.
Empirical research, which mainly focuses on real estate investment trusts (REITs)
primarily in the USA, has consistently shown that securitised property has
outperformed other common stocks on a risk-adjusted basis. This indicates that there
may be other driving forces of securitised property values compared to common
stocks. Since, securitised properties are listed on the stock exchange it is reasonable to
expect that securitised property prices will be driven by the equity market. However,
given that the underlying physical assets of securitised property are sensitive to
interest rate changes, one would strongly suspect that the fixed income market is the
main driving force of securitised property prices – at least over the long run.
Therefore, for securitised property, one might ask the question whether securitised real
estate is driven by the fixed income market or the stock market?
This question cannot be answered by simply examining the contemporaneous
correlation among securitised property markets, equity markets and fixed income
markets as this does not assist in ascertaining causal relationships. In ad dition,
numerous studies have documented that simple correlations among financial asset
returns are not very useful for either asset allocation decisions or hedging strategies,
and contemporaneous correlations always increase when market volatility increases
(King and Wadhwani, 1990; Lee and Kim, 1993; Longin and Solnik, 1995). Furthermore,
Darrat and Zhong (2002) showed that emerging stock markets (especially India,
Pakistan and Sri Lanka) are permanently driven by both the USA and Japanese stock
markets despite having very low correlations with both the USA and Japanese
markets.
This paper will use cointegration techniques in an attempt to identify whether
securitised real estate is driven by the fixed income or equity markets over the
long-term (from July 1998 to June 2006). These procedures allow the isolation of
permanent and transitory components among error-corrected vector autoregressive
systems. By decomposing securitised property price behaviour into components that
are driven by interest rates and the stock market, a more precise picture can be
developed as to the importance that these explanatory factors have in driving the
long-run trend of securitised property. For reasons indicated below the analys is is
carried out on listed property trusts (LPTs) in Australia[1] and Real Estate
Management and Development companies (REMDs) in both Australia and the UK.
The remainder of this paper is organised as follows: Section 2 pursues a brief
Literature review on securitised property, followed by Data and methodology in
Section 3. Empirical results and Discussions will be provided in Section 4 while
Section 5 will conclude this paper.
2. Literature review
2.1 Mixed signals
Empirical evidence has consistently shown that securitised property provides lower
unadjusted returns than other common stocks. However, when risk is taken into
consideration, securitised property tends to outperform other equity stocks (Mueller
et al., 1994; Ghosh et al., 1996; Chen and Peiser, 1999; Hartzell et al., 1999; Clayton and
MacKinnon, 2001; Sing and Ling, 2003). Moreover, the inclusion of securitised property
in an investment portfolio will usually enhance the portfolio return and/or reduce the
JPIF
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