Liquidity in global real estate securities markets. A cyclical and regional analysis pre, during and post GFC
| DOI | https://doi.org/10.1108/JPIF-11-2015-0078 |
| Date | 04 July 2016 |
| Pages | 321-346 |
| Published date | 04 July 2016 |
| Author | Nicole Lux,Alex Moss |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Liquidity in global real estate
securities markets
A cyclical and regional analysis pre, during
and post GFC
Nicole Lux
Department of Finance and Accounting, De Montfort University,
Leicester, UK, and
Alex Moss
Consilia Capital, London, UK and
Cass Business School, London, UK
Abstract
Purpose –The purpose of this paper is to test the relationship between liquidity in listed
real estate markets, company size and geography during different market cycles, specifically
pre-crisis (2002-2006) and post-crisis (2010-2014). Further, the study analyses the impact of stock
liquidity on stock performance. In a previous study the authors examined the impact
of liquidity on the valuation of European real estate shares. The result showed that there is a
strong relationship between liqu idity, valuation and market capita lisation post the Global
Financial Crisis.
Design/methodology/approach –The paper studies the linkages between regional market
liquidity and comp any size for 60 listed r eal estate compani es globally and dete rmines the key
drivers of company stock market liquidity pre- and post-crisis as well as the impact on stock
performance. Anal ysis of variance is u sed to test cross-sectional independence in market
liquidity combined with the Tukey’spost hoc test. The selected test indicators of liquidity to capture
market depth and market tightness are daily stock turnover as percentage of market capitalisation
and daily bid-ask sp reads.
Findings –Findings confir m previous studies t hat market liquid ity factors are co rrelated
globally over time i ndicating market s interdependence . However, sample g roups by company
size and geography fo rm independent samp les with different sa mple means, thus spe cific
liquidity levels i n each market may be dif ferent. First, st ock turnover leve ls have not recovere d
post-crisis to pre -crisis levels in the m ajority of markets w hile spreads have co ntinued moving
downward to nearly insignificant levels in line with the rest of the equity market. Second, with
regards to stock performance, the European bias previously detected is not apparent in the USA, and
there is no evidence of t he small cap vs large cap e ffect of small compan ies achieving supe rior
returns, although smaller companies have outperformed in Europe and Asia in each of the last three
years (2012-2014).
Practical implications –The key implication is that although spread levels for smaller companies
are higher, implying a slight risk premium when investing in small companies, this did not manifest
into consistent superior stock market returns in the periods studied. In a mature market such as the
USA or UK, liquidity levels in terms of stock turnover are higher and spreads are lower thus reducing
trading costs, making them more attractive for investors.
Originality/value –This research brings together previous analysis on stock market liquidity and
stock performance on a global market level. It further tests the dependence of market liquidity on two
key indicators, namely, geography and company size and analyses market changes with respect to
liquidity pre- and post-crisis.
Keywords REITs, Bid-ask spread, Listed real estate, Market liquidity, Regional correlation,
Stock turnover
Paper type Research paper
Journal of Property Investment &
Finance
Vol. 34 No. 4, 2016
pp. 321-346
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-11-2015-0078
Received 23 November 2015
Revised 24 January 2016
10 March 2016
Accepted 11 March 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
321
Global real
estate
securities
markets
Introduction
The correlation of global equity markets has been a long-term research top ic for
investors seeking the optimum combination of risk diversification and maximum
return. The quantitative analysis of international diversification dates back at least to
Henry Lowenfeld’s (1909) study of equal-weighted, industry-neutral, risk-adjusted,
international diversification strategies, using price data from the global securities
trading on the London Exchange around the turn of the century. He illustrates the
imperfect co-movement of securities from various countries. In general, global equity
markets and regional markets are often correlated with one another, especially in times
of economic recession with prominent contagion and spillover effects. Listed real estate
companies are considered attractive because of their liquidity, and exposure to
underlying real estate returns. Since the evolution of the modern-REIT era in 1992 in
the USA, there has been a significant increase in market capitalisation, both in absolute
terms and relative to the general equity market, as well as improvements in liquidity.
But, with respect to previous findings about the correlation and co-movement in equity
markets during times of stress, how have listed real estate markets been affected by the
Global Financial Crisis (GFC) 2007/2008 in terms of market liquidity and performance?
This research aims to explore dependence in global markets focusing on factors of
liquidity over three different time intervals, pre, during and post-GFC. We will analyse:
(1) how liquidity in global listed real estate markets has changed pre (2002-2006),
during (2007-2009) and post-crisis (2010-2014);
(2) whether liquidity is primarily influenced by company size and geography; and
(3) the impact of liquidity and company characteristics on performance.
Even in relatively stable periods, co-moving trending behaviour can be found across
equity markets for stock returns, volatility and trading volumes. Singha et al. (2010)
examine the stock returns volatility spillover effects across 15 stock markets of North
America, Europe and Asia employing a vector auto regression model, which is used to
capture the linear interdependencies among multiple time-series data.
This paper uses liquidity measures which do not require microstructure data that
might not be available on a comparative level for international markets. While most
other studies have focused on risk and return, this research explores co-m ovements in
market liquidity in different securities markets. The first section starts by analysing
the dependence of liquidity on key variables, namely, geography and company size
and explores the differences in market liquidity during three time intervals between
2002-2014. The next section of the research links liquidity drivers and performance.
By classifying the data of 60 global companies into different groups to distinguish
samples by country of origin and size, the paper analyses the impact of the so-called
small cap effect on listed real estate companies’liquidity globally. The idea of a small
cap premium is more than two decades old. Rolf Banz (1981) found, however, that this
relationship is not linear and that this effect only affected the smallest firms in the
market (~20 per cent of the smallest firms).
From a practical standpoint, this study is relevant because a number of practitioners
have been attracted to small cap stocks owing to academic research (e.g. Keim, 1983;
Fama and French, 1992), which provides evidence that expected returns of small cap
stocks are systematically different from those of large cap stocks. This research
expands previous studies focusing on small vs large cap effect in terms of market
liquidity, which ultimately impacts overall stock performance. Hence, this study
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JPIF
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