Academic journal article Journal of Real Estate Literature

International Articles: Do Real Estate Stocks Hedge Inflation in the Long Run? Evidence from Three East Asian Emerging Markets

Academic journal article Journal of Real Estate Literature

International Articles: Do Real Estate Stocks Hedge Inflation in the Long Run? Evidence from Three East Asian Emerging Markets

Article excerpt

Abstract

Unsecuritized real estate is often hailed for its inflation-hedging quality. Do real estate stocks exhibit this desirable inflation-hedging characteristic in the long run? Existing studies mainly focus on American real estate investment trusts (U.S. REITs) and British real estate stocks. Extending these studies, this paper explores the long-run, inflation-hedging properties of real estate stocks in Malaysia, the Philippines, and Taiwan. Contrary to results based on data from developed markets, the empirical evidence in this study clearly shows that real estate stocks do not provide a hedge against inflation in the long run in the three East Asian emerging markets in this study.

(ProQuest: ... denotes formulae omitted.)

Even though inflation is not a popular topic covered in the media, it is a persistent threat to investors and has the potential to erode gains, particularly for long-term investors (Kearns, Rolley, and Sarlo, 2010). Researchers believe that inflation is a more pressing concern during the process of recovery from financial crises. In fact, the decline in global inflation to 1% in 2009 has already reversed, rebounding to 3% in May 2010 (Kearns, Rolley, and Sarlo, 2010). Moreover, the risk of rising inflation is more clearly apparent in emerging markets relative to developed countries (Kearns, Rolley, and Sarlo, 2010). This implies that inflation hedging should remain an important component of long-run investment policy, particularly under the current government policy of quantitative easing, partially achieved through massive injections of money into economies (Attiéand Roache, 2009).

Because of the limited supply and level of liquidity in the inflation-linked bond and derivatives markets, investors continue to rely on the indirect hedging properties of traditional asset classes (Kearns, Rolley, and Sarlo, 2010). Particularly, investors widely believe that real estate is an asset class that helps offset the impact of inflation over the long term (Lynn, 2010). The academic literature generally agrees that, consistent with the Fisher (1930) hypothesis, investing directly in real estate is at least a partial hedge against expected inflation (Glascock, Lu, and So, 2002; Lynn, 2010). This is a highly desirable property for long-term investors, such as sponsors or individual members of immature, defined-benefit pension plans (Hoesli, Lizieri, and Macgregor, 2008; Zhang and Ewald, 2010), and it is also desirable for small, young investors seeking secure retirements (Blackman, 2009).

Direct real estate investments, however, feature large fund outlays, low liquidity, high transaction costs, maintenance expenditures, and management (Wilson and Zurbruegg, 2003). One possible way to overcome these drawbacks, which are particularly onerous in international real estate investment, may be through the acquisition of shares in real estate companies (Maurer and Sebastian, 2002; Wilson and Zurbruegg, 2003). In fact, international real estate securities investing has become increasingly popular in recent years, as evidenced by the growth of the number of global real estate funds (Lee, Lee, and Chiang, 2007; Lee, Kuo, Lee, and Lin, 2011).

Understanding the long-run, inflation-hedging properties of real estate stocks will help investors make better investment decisions. Therefore, the motivation to examine this issue is its important investment implications for real estate securities investors.

Specifically, the purpose of this study is to examine the long-run, inflation-hedging properties of real estate stocks in three East Asian emerging markets. In so doing, this study offers contributions to the following areas of study. First, this study examines the cointegrating relationship of real estate stock prices and inflation. In contrast, most existing studies have examined whether real estate securities prices were cointegrated with inflation. However, this approach cannot clearly show the inflation-hedging properties of real estate stocks because cointegration does not guarantee positive long-run relationships in the series (Enders, 1995). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.