Comovements in UK regional property markets: a multivariate cointegration analysis
| Date | 01 August 2003 |
| Pages | 326-347 |
| Published date | 01 August 2003 |
| DOI | https://doi.org/10.1108/14635780310483629 |
| Author | Andrew C. Worthington,Helen Higgs |
| Subject Matter | Property management & built environment |
JPIF
21,4
326
Journal of Property Investment &
Finance
Vol. 21 No. 4, 2003
pp. 326-347
#MCB UP Limited
1463-578X
DOI 10.1108/14635780310483629
Comovements in UK regional
property markets:
a multivariate cointegration
analysis
Andrew C. Worthington and Helen Higgs
School of Economics and Finance, Queensland University of Technology,
Brisbane, Australia
Keywords Property marketing, Pricing, United Kingdom
Abstract This paper examines the short an d long-term comovements am ong UK regional
property markets over the p eriod 1976-2001. The market s examined are London, Outer So uth
East, East Anglia, South West , East Midlands, West Midlands , Yorkshire and Humberside,
North and North West. Multiva riate cointegration procedures, Granger no n-causality tests, level
VAR and generalised variance de composition analyses based on er ror-correction and vector
autoregressive models a re conducted to analyse relat ionships among these market s. The results
indicate that there is a stat ionary, long-term relatio nship and a number of long-t erm causal
linkages between the vari ous UK property markets. In ter ms of the percentage of vari ance
explained, other regiona l markets are generally more i mportant than innovations i n a given
region, though this is not the cas e for the Outer South East. The Outer South East market is
segmented from the other r egional markets, though a lso extremely influentia l in explaining
forecast variance in th ese markets. The overall su ggestion is that opportu nities exist for
portfolio diversific ation in the UK regional pr operty market, and the Out er South East market
should be seen as containi ng valuable information for forecasting performance in the regional
markets.
Introduction
Diversification is a dominant theme in the property investment literature. If,
and as has been hypothesised, low correlations of returns exist, diversifying
across various categories of property investment may allow investors to reduce
portfolio risk while holding expected return constant. However, despite the
obvious importance of this body of thought to portfolio managers, the
application of Markowitz portfolio theory to the property market is
comparatively recent, with the original focus on property's role in a mixed asset
portfolio (Hamelink et al., 2000). More lately, emphasis has moved to
investigating the implications of portfolio theory within the property portfolio
itself.
The first strand of empirical endeavour as discussed has largely concerned
itself with the optimal allocation of property in a ``mixed asset'' portfolio,
encompassing property, bonds, bills and stocks. Lins et al. (1992), Liu and Mei
The Emerald Research Register for this journal is available at
http://www.emeraldinsight.com/researchregister
The current issue and full text archive of this journal is available at
http://www.emeraldinsight.com/1463-578X.htm
The authors wold like to thank an anonymous referee for helpful comments on an earlier
version of this paper. The financial assistance of an Australian Techology Network (ATN)
Research Grant is also gratefully achknowledged.
Regional
property
markets
327
(1998), Rubens et al. (1998), Gordon et al. (1998), Giliberto et al. (1999),
Chandrashekaran (1999) and Tuluca et al. (2000) have recently examined the
prospects for diversification for mixed asset portfolios that include a property
component. This work has generally concurred with Chandrashekaran's (1999,
p. 111) finding that property investment:
...appears to offer significant diversification benefits, at least during certain time periods.
An extension of this work has used the notion of mixed asset portfolio
diversification to obtain the optimal country allocation of property investment.
De Wit (1997), Eichholtz et al. (1998), Wilson and Okunev (1999), Quan and
Titman (1999), Cheng et al. (1999), Stevenson (2000) and Eichholtz et al. (2001)
have all drawn upon Markowitz portfolio theory in this manner. In contrast to
the work on domestic mixed asset portfolios, the evidence concerning global
property investment is less conclusive. Cheng et al. (1999, p. 463), for example,
found that:
...our results suggest that although foreign real estate is not likely to provide investors with
significant diversification benefits, substantial amounts of foreign real estate can be optimal.
Alternatively, Eichholtz et al. (2001, p. 365) countered the:
...trade-off between the costs and benefits of international diversification ...
with the suggestion that:
... the costs for property investors can be reduced substantially through investments in
public real estate securities, which concentrate on their local domestic market.
Lizieri and Finlay (1995) provide an overview of some of the many pertinent
issues in international property portfolio diversification.
The second strand of empirical endeavour has examined ``within property''
portfolio diversification by property type and/or geographic region. Recent
studies in this area include Hartzell et al. (1986), Graff and Young (1996),
Williams (1996), Sivitanides (1996), Hoesli et al. (1997), Eichholtz et al. (1998),
Wolverton et al. (1998), Cheng and Black (1998), Henneberry (1999), Viezer
(2000), Byrne and Lee (2001) and Brown et al. (2000). The evidence concerning
within property diversification is also somewhat mixed. For instance, in a
study of UK sectors and regions Byrne and Lee (2001) concluded that risk
reduction was limited because of high positive correlations between assets in
the property portfolio. Conversely, Viezer (2000, p. 94) found that:
...in support of the main body of real estate research, economic diversification was found to
be superior to geographic diversification ...
and that:
...MPT-efficient portfolios provide considerably higher expected returns than naõÈve (equal
weighted) portfolios.
Seiler et al. (1999) provide a useful review of the literature concerning the
diversification benefits of property in both mixed asset and within property
portfolios.
To continue reading
Request your trial