International Articles: International Direct Real Estate Market Linkages: Evidence from Time-Varying Correlation and Cointegration Tests

Article excerpt

Abstract

This study examines the linkage between direct real estate markets in the United States, United Kingdom, Australia, Hong Kong, and Singapore from both the long-term and short-run perspectives over the period 1988-2008. The evidence indicates no co-integrating relationship exists in over 80% of the direct real estate market systems. The absence of a long-run stable relationship implies the presence of potential gains from international diversification in direct property investing, as many markets/sectors move separately with no shared common stochastic trend. Moreover, the conditional return relationships between the five major real estate markets are time-varying especially when the return series are inflation-adjusted. Finally, although the short-term co-movements between many real estate markets are still very low, stronger return relationships among the five major real estate markets are present, implying that portfolio managers should expect some reduced diversification benefits in the long run.

This paper examines the relationships among five major international direct real estate markets (the United States, United Kingdom, Australia, Hong Kong, and Singapore) from both the long-term and short-run perspectives over the 1998-2008 period. Throughout the analysis, the findings for the direct real estate markets will be compared with the corresponding results for the indirect real estate markets. The longterm relationship will be assessed using the Autoregressive Distributed lag (ARDL) linear co-integration, as well as the Gregory and Hansen (1986) approach, which allows for a structural break in the relationship. The short-term linkage will be examined using the Dynamic Conditional Correlation (DCC) modeling. In light of growing interdependencies between national stock markets, the international correlation and co-integrating structure of major direct real estate markets is important to investors seeking to capture portfolio benefits from international direct real estate investment. A better understanding of cross-market linkages and interactions will help to manage better international financial exposure. Although this topic has been excessively studied for international stock markets and lesser for real estate securities markets, there is a paucity of research on the direct real estate markets due mainly to lack of longer and reliable time-series data. The study is important as investors continue to search for diversification in real estate and mixed asset portfolios (Lim, McGreal, and Webb, 2008).

This paper contributes to the extant literature in three ways. First, it extends the knowledge of the five major direct real estate markets and their constituent sectors. Second, two novel co-integration techniques are applied to the investigation of international real estate market linkages. Third, evidence is provided of the timevariation, as well as the increase/decrease in co-movements between the respective markets using advanced GARCH modeling. The combination of the various econometric tests used in this study represents a modest methodological contribution to the extant literature in international real estate.

The remainder of the paper is organized as follow. The next section discusses the extant literature on cross-market linkages. This is followed by a presentation of data and methodology used in the study. Thereafter the empirical results as well as their implications for international real estate market interdependence are discussed. The final section concludes the study.

Brief Literature

The literature review reveals that the focus of past work has been largely on stock markets, and to a lesser extent real estate securities markets, with little formal attention given to direct real estate markets primarily due to lack of reliable and longer published time-series market indices.

Real estate is a major capital asset that contributes to both investor diversification and wealth creation. …