The long-term linkages between direct and indirect property in Australia

Abstract

The authors study the linkages between direct and indirect Australian property sectors from 1985 to 2013, with shares and bonds. This paper employs an Autoregressive Fractionally Integrated Moving Average (ARFIMA) process to de-smooth a valuationbased direct property index. The authors establish directional lead-lag relationships between markets using bi-variate Granger causality tests. Johansen cointegration tests are carried out to examine how direct and indirect property markets adjust to an equilibrium long-term relationship and short-term deviations from such a relationship with other asset classes. Findings – The authors find the use of appraisal-based property data creates a smoothing bias which masks the extent of how information is transmitted between the indirect property sector, stock and bond markets, and influences returns. The authors demonstrate that an ARFIMA process accounting for a smoothing bias up to lags of four quarters can overcome the overstatement of the smoothing bias from traditional AR models, after individually appraised constituent properties are aggregated into an overall index. The results show that direct property adjusts to information transmitted from markettraded A-REITs and stocks. Practical implications – The study shows direct property investments and A-REITs are substitutible in a multi-asset portfolio in the long and short term. Originality/value – The authors apply an ARFIMA(p, d, q) model to de-smooth Australian property returns, as proposed by Bond and Hwang (2007). The authors expect the findings will contribute to the discussion on whether direct property and REITs are substitutes in a multi-asset portfolio

On the dynamic interactions between sector-level REITs, their direct real estate counterparts and the stock market in Japan

“…Following Oikarinen, Hoesli, & Serrano (2011) and Hoesli & Oikarinen (2012), we use the national stock market index as the proxy for common stocks. The choice of sample are also similar with recent and previous studies, such as in US and UK market (Hoesli & Oikarinen, 2012, 2016, Yong & Pham (2015) in Australia as well as in other international markets (Yunus, Hansz, & Kennedy, 2012).…”

“…Before this, Mei & Lee (1994) and Geltner & Kluger (1998) (Morawski, Rehkugler, & Fuss, 2008;Sebastian & Schatz, 2009). Furthermore, similar tight long-run relationship between REITs and direct real estate occur in the other international market like Australia and Netherlands (Yong & Pham, 2015;Yunus et al, 2012). Oikarinen et al (2011) highlight the tight relationship between REITs and direct real estate exist since no cointegration between REITs and stocks in the long-run.…”

“…Granger Cause the direct real estate in US and UK markets respectively. Recent evidence support this causal relationship in other market like Australia and Netherlands (Yong & Pham, 2015;Yunus et al, 2012). Overall, these findings indicates price discovery generally initiates in REITs, since they react faster to changes in market information over the direct real estate market (Li, Mooradian, & Yang, 2009;Ling & Naranjo, 2015;Yavas & Yildirim, 2011 (Hoesli et al, 2015;Yavas & Yildirim, 2011).…”

“…21 According to Sun, Titman, & Twite (2015) direct real estate indices seem to be less volatile than REITs indices. This exhibit arises since the direct real estate indices are being constructed as appraisal-based, where appraisers may rely on past information in valuing the underlying properties (Yong & Pham, 2015). Since then, appraisers tend underreact to changes in current market condition (Li et al, 2009).…”

The short-run dynamics of Australian real estate investment trusts and direct real estate at the subsector level

“…Many research papers have identified a significant long-run relationship between REITs and direct real estate returns (Giliberto, 1990;Mei and Lee, 1994;Geltner and Kluger, 1998;He, 2000;MacKinnon and Al Zaman, 2009;Oikarinen et al, 2011;Yunus et al, 2012;Yong and Pham, 2015), with the latter paper studying Australian markets. These findings are consistent with general expectations of competitive markets, given the underlying composition of REITs consist of a portfolio of direct real estate itself.…”