Real estate assets, markets and investor information

Citation

Glascock, J. (2014), "Real estate assets, markets and investor information", International Journal of Managerial Finance, Vol. 10 No. 2. https://doi.org/10.1108/IJMF-01-2014-0009

Real estate assets, markets and investor information

Article Type: Guest editorial From: International Journal of Managerial Finance, Volume 10, Issue 2.

Following the recent global liquidity crisis and its affect on real estate markets[1], there has been increased interest in understanding real estate markets. This special issue of the International Journal of Managerial Finance provides a venue to pursue several questions about real estate and its market. Bai et al. (BCD) (2014) find that larger REITs were better able to pursue profits as they de-leveraged during the recent economic cycle. Rodríguez and Romero (RR) (2014) find that global REIT funds (based in the USA) were able to earn excess returns for one of their test periods but it was associated with geographically successful areas. Bao et al. (2014) study the valuation process in China and find that, in general, the Chinese market impounds the same set of variables as the USA market: however, they find that the entity that purchases the real estate has an impact on value. This influence is particularly true for State Owned Enterprises (SOEs), which seem to pay too much. Rossini and Kupke (RK) (2014) study Adelaide real estate in Australia and find an interactive effect on house and land prices. Land prices seem to anticipate higher house prices. Hsieh (2014) examines trading volume and volatility of Asian listed real estate to more fully understand those markets. In general, she finds that listed real estate seems to have consistent behavior with the stock markets, in general, for the Asian countries in her sample. Finally, Ho and Addae-Dapaah (HA) (2014) study office markets in Kuala Lumpur, Hong Kong and Singapore. They find that Hong Kong and Singapore have more price volatility and are more prone to business cycles in the office sector than Kuala Lumpur.

BCD (2014) study the question of leverage and REITs during the recent economic disturbance. There has been interest in whether or not REITs over-leveraged during the economic “bubble” and subsequently went through a re-ordering of their capital structure. BCD use a difference in difference methodology to examine firm investment and strategy and find that the debt/equity behavior was largely supply-side driven. They also find that the primary response was by small REITs and REITs who had no credit rating – thus suggesting that the change in behavior was by those more risky REITs and not the industry as a whole. This behavior also limited the substitution of other debt and even equity from internal funds to replace the leverage that had been in place for these more risky REITs. However, larger REITs reacted by de-leveraging and increased their profits across the event. From an investor's point of view, one should not treat all REITs the same, the larger REITs seem to have more ability to positively influence their use of capital structure. This result is consistent with recent efforts by Titman (2001) who shows that capital supplies influence the choice of capital structure and Glascock and Lu-Andrews (2013) who show that REITS that are larger with more liquidity are more market oriented.

RR (2014) examine the performance results of US-based global REIT funds. In particular, they examine the funds’ domestic vs foreign security exposure. They find that over the test period global managers outperform the benchmark market in terms of return. RR point out that global real estate mutual funds (GREMF) can be especially useful to American investors by providing them access to foreign real estate securities while keeping the overall portfolio well invested in US securities. Their overall results are consistent with the outcomes found by Gallo et al. (2000) and they find excess return during the 2001-2005 period (but not for the later period of 2006-2010). However, the work also shows that the excess return is associated with geographic regions that had the best overall results – thus, perhaps this is a time sensitive result. These results are consistent with the efforts of Glascock and Kelly (2007) who show that real estate performance is sensitive to geographic diversification and that geographic diversity is more important than cross-asset diversification for explaining returns. This result also has been found in the more general finance literature as well.

Bao et al. (2014) produce a work that examines the pricing behavior of land in China and find that it is roughly equivalent to western outcomes except that the buyer's characteristics have a further influence on price. One important reason for this research is that, of 22 key articles published on land in China in the last five years, only two articles offered empirical results. Their work adds more and important empirical evidence for the process of the valuation of land in China. Their works shows that the traditional attributes of – size, planning use, location and neighborhood characteristics are important in China as we would have expected from the extensive empirical evidence from the west. A further outcome is that foreign buyers tend to pay less than a local buyer and this is especially true for a SOE as the local buyer. It may be that the uncertainty for a foreign buyer is made up by a lower price to attract them to China. At the same time, SOEs may be able to pay more due to their ability to better insure local outcomes that enhance the property's value.

RK (2014) study available land for development and house prices in Australia. Their primary result is that house price appreciation is anticipated in land prices and thus, from a Granger causality point of view, land price increases precede house price increases, especially in rising markets. Their study is about house prices and vacant land available for building in Adelaide, Australia. Further work is encouraged to fully understand the interaction between current and future process and vacant land value. One key issue is that differing markets, for example across countries, seem to have different impact relationships. Ooi and Lee (2007) found much stronger and quicker impacts than are found in the RK study.

Hsieh (2014) examines the trading volume and volatility of Asian listed real estate firms. Her effort provides us with more clarity about how volume affects price formation. Her results show that general rising markets are associated with increased volume levels and bear markets are associated with falling volume levels. Her Granger causality tests indicate that stock return movements cause return volume. These results suggest that, in general, listed real estate have features more consistent with traded markets than do real estate assets that are not held in listed form. Additionally, separate tests by country market suggest that Malaysia, Philippines, Singapore and Thailand have more highly correlated results indicating a deeper and more integrated market for stocks including listed real estate. Finally, her results show that Singapore financial variables, the largest and most developed country in the group, have the most predictive influence on the other countries. These outcomes are consistent with the work of Isakov and Perignon (2000).

HA (2014) study the Prime Offices markets in Kuala Lumpur, Singapore and Hong Kong. HA find a good fit for the rental and vacancy aspects of the Kuala Lumpur, Singapore and Hong Kong markets. They also find that the office rents in Singapore and Hong Kong are much more volatile than those of Kuala Lumpur. The Singapore and Hong Kong markets are more prone to cyclical fluctuations as well.

Overall, the research presented in this special issue of the International Journal of Managerial Finance helps us to better understand real estate in a trade market context. As with previous research, these papers show real estate markets as efficient. For example, Bao et al. (2014) show that even in China the standard variables are important for land prices; RK (2014) show that as we expect when house prices are expected to increase, land prices move up in anticipation; and BCD (2014) remind us that it was the more risky REITs that needed to respond with capital structure changes more often after the Great Recession than larger stronger REITs. Additionally, these papers help us to remember that real estate is different by country due to institutional details. HA (2014) find that Singapore and Hong Kong's real estate are more volatile than Kuala Lumpur and Hsieh (2014) finds that Singapore has most impact on its neighbors in her sample. The Great Recession changed real estate due to changes in fundamental forces, but overall we find an efficient market that is still influenced by institutional features that are unique to local markets.

Professor John L. Glascock
Center for Real Estate and Urban Studies, University of Connecticut, Storrs, CT, USA

Note

1. For a good description of the current view of why the crisis turned into the great recession, see Gorton and Metrick (2012) and Foote et al. (2012).

References

Bai, Q., Chang, Q. and Devine, A. (2014), “Capital market supply and REITs’ financing and investment decisions”, International Journal of Managerial Finance, Vol. 10, p. 2
Bao, H., Glascock, J., Zhou, S. and Feng, L. (2014), “Land value determination in an emerging market: empirical evidence from China”, International Journal of Managerial Finance, Vol. 10, p. 2
Foote, C., Gerardi, K. and Willen, P. (2012), “Why did so many people make so many ex post bad decisions? The causes of the foreclosure crisis”, Policy Decision Paper No. 12-2, Federal Bank of Boston, July 20
Gallo, J., Lockwood, L. and Rutherford, R. (2000), “Asset allocation and performance of real estate mutual funds”, Real Estate Economics, Vol. 28 No. 1, pp. 165-184
Glascock, J. and Kelly, L. (2007), “The relative effect of property type and country factors in reduction of risk of internationally diversified real estate portfolios”, Journal of Real Estate Finance and Economics, Vol. 34 No. 3, pp. 369-384
Glascock, J. and Lu-Andrews, R. (2013), “REITs and market declines”, working paper, UCONN Real Estate Center
Gorton, G. and Metrick, A. (2012), “Securitized banking and the run on repo”, working paper, NBER and Yale University, draft November 9
Ho, D. and Addae-Dapaah, K. (2014), “Real estate market cyclical dynamics-the prime office sectors of Kuala Lumpur, Singapore and Hong Kong”, International Journal of Managerial Finance, Vol. 10, p. 2
Hsieh, S. (2014), “The causal relationship between stock returns, trading volume, and volatility: empirical evidence from Asian listed real estate companies”, International Journal of Managerial Finance, Vol. 10, p. 2
Isakov, D. and Perignon, C. (2000), “On the dynamic interdependence of international stock markets: a Swiss perspective”, Swiss Journal of Economics and Statistics, Vol. 136, pp. 123-146
Ooi, J. and Lee, S. (2007), “Price discovery between residential land and housing markets”, Journal of Housing Research, Vol. 15 No. 2, pp. 95-112
Rodríguez, J. and Romero, H. (2014), “Global real estate mutual funds: regional exposure and forecasting skill”, International Journal of Managerial Finance, Vol. 10, p. 2
Rossini, P. and Kupke, V. (2014), “Estimating the short and long run relationship between vacant allotment and established home prices”, International Journal of Managerial Finance, Vol. 10, p. 2
Titman, S. (2001), “The Modigliani and Miller theorem and market efficiency”, Working Paper No. 8641, NBER, Cambridge, MA

Further reading

Griffin, J. and Karolyi, G. (1998), “Another look at the role of the industrial structure of markets for international diversification strategies”, Journal of Financial Economics, Vol. 50, pp. 351-373
Heston, S. and Rouwenhorst, G. (1994), “Does industry structure explain the benefits of industrial diversification”, Journal of Financial Economics, Vol. 36, pp. 3-27

About the Guest Editor

John L. Glascock is a Full Professor and Director of the UCONN Center for Real Estate and Urban Studies at the University of Connecticut. He was previously the Grosvenor Endowed Professor at the University of Cambridge (UK). John has published in finance, management and economic journals in additional to his work in real estate. John's work has been cited in the core finance, economics and management journals including, Journal of Finance, American Economic Review, Journal of Financial Economics, Review of Financial Studies, Academy of Management Journal, Journal of Banking and Finance, Journal of Financial and Quantitative Analysis, Southern Economic Journal, Journal of Business, Journal of Political Economy, Journal of Regional Science and Administrative Science quarterly as well as all of the key real estate journals. John's research interest is REITs and housing policy. He has provided consulting advice to the HM Treasury (UK), South Korea, State of Ohio, State of Louisiana, Department of Justice, Taiwan and China and many private clients. He is active in real estate professional and academic groups including the Royal Institute of Charted Surveyors, NAIOP, SIOR, American Real Estate Society and the American Real Estate and Urban Economics Association. John L. Glascock can be contacted at: mailto:John.Glascock@business.uconn.edu