The convergent behavior in REIT markets
| Pages | 42-57 |
| Date | 03 February 2012 |
| Published date | 03 February 2012 |
| DOI | https://doi.org/10.1108/14635781211194791 |
| Author | I‐Chun Tsai,Cheng‐Feng Lee |
| Subject Matter | Property management & built environment |
The convergent behavior in REIT
markets
I-Chun Tsai
Department of Finance, National University of Kaohsiung,
Kaohsiung City, Taiwan, and
Cheng-Feng Lee
Department of Business Administration,
National Kaohsiung University of Applied Sciences, Kaohsiung City, Taiwan
Abstract
Purpose – The purpose of this paper is to analyze whether a convergent behavior exists in the price
indexes of the seven Asian Real Estate Investment Trust (REIT) markets.
Design/methodology/approach – The authors investigate the convergent behavior in Asian REIT
indexes against Japan and the USA by conducting the unit-root testing procedure.
Findings – Results show that the Asian REIT markets are more connected with the US REIT market
than with that of Japan. The convergent behavior was more obvious since 2007.
Practical implications – The underlying assets of real estate securities in different countries are
usually not directly related; hence, there should be segmentation to a certain extent between
international REIT markets as well. If the performances of Asian REIT markets are converged, this
linkage can be viewed as a contagion effect.
Originality/value – The results of this paper indicate that the risk of REITs might be
underestimated and the benefit that investors may acquire from adding REITs to their portfolios
might be overestimated.
Keywords Property investment,Prices, Real Estate Investment Trust,Contagion effect, Panel test,
Asian markets
Paper type Research paper
1. Introduction
The Real Estate Investment Trust (REIT) market was created more than 40 years ago in
the USA. Over the years, several changes to the legislations and taxation structures,
such as the Tax Reform Act (1986), REIT Simplification Act (1997), and REIT
Modernization Act (RMA, 1999), were implemented by the US Congress. These
legislations had a significant effect on the growth of the US REIT market. At present, the
USA has the most mature REIT market, but despite the history of REITs in Asia being
relatively short, the growth in these markets is significant. Even Japan’s REIT market,
established in 2001, is relatively new and incomparable with that of the USA, yet the
market value of the former doubled at a pace ten times faster than that of the latter. In
addition, the REIT markets of Singapore, Hong Kong, Malaysia, Thailand, Taiwan, and
Korea have experienced rapid growth. Thus, REITs have immense potential in Asia, and
by market capitalization, Japan – the most mature REIT market in this continent –
constitutes about 55.8 percent of market share.
The current issue and full text archive of this journal is available at
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JEL classification – G01, G11, G14, G15
JPIF
30,1
42
Journal of Property Investment
& Finance
Vol. 30 No. 1, 2012
pp. 42-57
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211194791
Because the REIT markets in Asian regions are high performing, fund managers
have been advocating to focus on Asian REIT markets since 2006. However, do
sizeable foreign investments affect the features of REITs? Does attracting large foreign
investment affect the relationship among Asian REIT markets?
As a perennial investor-attractive market, real estate is known for its defensiveness in
portfolio asset allocation, which can be attributed to the low interconnection among real
estates in different areas. Previous empirical studies also provide evidence to support
this advantage of defensiveness. For example, Eichholtz et al. (1998) found that real
estate market segmentation between continents exists. Liu and Mei (1998) pointed out
that international public property markets are segmented, which benefit the
international div ersification in real e state. Garvey et al. (2001) analyzed the
connection between the four largest Asia-Pacific public real estate markets (Australia,
Hong Kong, Japan, and Singapore). The long- and short-term analyses reveal only
minimal linkages among these markets.
The findings of Wilson and Zurbruegg (2001), however, do not favor segmentation
between international real estate markets; their findings indicate that real estate markets
in the UK, Japan, and Australia are interrelated, particularly with the US market. The
contrasting results may be caused by the financial events during their sample periods.
Using the data covering the period of the Asian financial crisis, Kallberg et al. (2002)
found that the financial crisis has reduced real estate returns and increased real estate
volatility, as well as correlation with other asset classes. On the other hand, Gerlach et al.
(2006) used data and cointegration analysis from the Asia-Pacific public real estate
markets of Japan, Malaysia, Hong Kong, and Singapore; they found that these property
markets are integrated despite a structural shift occurring at the time of the crisis.
According to the studies mentioned above, results appear to differ among one another,
whether or not the international real estate markets are connected, and whether there is a
contagion effect in this kind of market.
The strong linkage among international stock markets is obvious. With regard to the
contagion effect, King and Wadhwani (1990) were the first to measure contagion as a
significant increase in the correlation between asset returns. They analyzed
the correlation between US, UK, and Japanese stock returns around the time of the
1987 stock market crash and found that the degree of correlation had increased after
October 1987. Then, there are empirical studies following the type of test for contagion
employed by King and Wadhwani (1990); examples are the studies of Forbes and
Rigobon (1999, 2002) and Corsetti et al. (2001).
Several studies focused on discovering the contagion effect in international
securitized real estate markets. Since the underlying assets of securitized real estates in
different countries are usually not directly related. Thus, there should be segmentation
to a certain extent between international securitized real estate markets as well. As a
result, if international securitized real estate markets are highly connected, previous
studies usually view this linkage as the contagion effect.
Wilson and Zurbruegg (2004) used conditional and unconditional correlation
analyses to test whether there is a contagion effect from the Thailand securitized real
estate market to four other Asia-Pacific real estate markets. Results show evidence of
some contagion effect from Thailand to Hong Kong and Singapore between early July
and late October 1997. These also suggest that the influence of equity markets is more
relevant in affecting other financial markets than the real estate markets themselves.
The convergent
behavior in REIT
markets
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