Guest editorial

Citation

Foo Sing, T. and Eng Ong, S. (2004), "Guest editorial", Journal of Property Investment & Finance, Vol. 22 No. 1. https://doi.org/10.1108/jpif.2004.11222aaa.001

Guest editorial

By virtue of the immobility and fixity of real estate assets, investment in real estate has always been seen as a localized business that is strongly influenced by local market practices and culture. It is important to understand the housing choice and preference of local residents, their shopping behaviors, and the ways businesses and manufacturing activities are carried out by local and foreign corporations in any country, if one were to make reliable projections and judgment on the demand and market trends for different real estate sectors. Local legislations governing the ownerships of real estate and land also play an important role in determining the tenure choice in local and international real estate investment. The government is another important player in the real estate market, whose role is to set policies on land use and taxation to ensure that scarce land resource is put to optimal use and the revenue from land sales and assignment could be efficiently captured through various taxes.

From investors’ perspective, real estate could be an effective risk diversifier in a portfolio that consists of stocks and bonds due to the ex-post low correlations between real estate returns and the two asset classes. However, illiquidity and high initial equity outlays in the acquisition of real estate are of concern to institutional investors when considering real estate in their portfolio. Investing in securitized real estate has been adopted as an alternative strategy for institutional investors to stake a claim in the real estate market. An efficient portfolio that comprises only of domestic assets could diversify significant idiosyncratic risks associated with different asset classes, but it is still not insulated against the systematic economic and market shocks. Investment in real estate outside domestic markets has been proposed as an effective way to diversify away domestic systematic risks in the standard portfolio theory by Grubel (1968), Levy and Sarnat (1970) and Solnik (1974). The international portfolio concept was then extended to include securitized and direct real estate classes. Sirmans and Worzala (2003) and Worzala and Sirmans (2003) provide comprehensive review of literature in these aspects of international portfolio diversification in real estate. Beside currency risk issues that are widely debated in allocating investment across different markets, the consistent and reliable performance indicators for different real estate markets are also an issue of contention for institutional investors that hold international real estate assets.

International real estate is a complex and encompassing term in the real estate literature. It covers a wide range of evolving issues from unique local market characteristics to more global issues of international portfolio diversification involving real estate asset class. This special issue of the Journal of Property Investment & Finance on “International real estate” puts together six excellent papers with the aim of disseminating and promoting research in this subject area. There is much room for future research as investors become increasingly international in their scope and perspectives. The collection of the papers in this special issue is no way deemed to be exhaustive, but the papers at least cover topical issues that are specific to different markets. With this special issue, we hope that a strong and clear theme for international real estate research can be developed over time. A brief summary of each paper is given below.

From the US pension fund asset allocation perspective, Simon Stevenson examines the effectiveness of domestic real estate asset in diversifying risks in a mixed international asset portfolio consisting US equities, US fixed income securities, international bonds, international equities and cash. By imposing constraint to the base portfolio, the results of the optimal portfolio weight distributions between international and home assets will be more reflective of the typical US pension fund allocation strategy. The performance of the international mixed asset portfolio with the inclusion of real estate asset is empirically tested using both in-sample and out-of-sample methodologies. The results are mixed. Although the in-sample strategy allocates substantial weight to real estate asset, the portfolio performance does not, however, increase significantly to justify for such high allocation in the portfolio. The out-of-sample allocation results based on a five-year rolling window period provide more positive performance to support the inclusion of real estate in the mixed asset portfolio.

Allocation decision is highly dependent on an accurate benchmarking and measurement of real estate price movements. Sau Kim Lum surveys various index construction methodologies adopted in several commonwealth countries, and discusses possible measurement biases caused by inadequate adjustment to the quality of assets in the index basket. She proposes two alternative index construction methodologies to explicitly deal with quality adjustment in the index construction: the standard weighted repeat sales and the non-parametric locally weighted regression approaches. She estimates the two quality-adjusted indices based on the universal set of residential transaction data in Singapore, and deviations in the short-run dynamics when compared to the official benchmark indices were clearly shown. The results imply that the measurement biases, if not property corrected, may lead to distortion in the asset allocation decisions of the institutional investors.

Ming-Chi Chen, Yuichiro Kawaguchi and Kanak Patel examine the time-series behavior of house prices in four Asian markets, and they also compare the results with that in the UK housing market. They use the structural time-series methodology to uncover the unobserved trend, seasonal and cyclical components in the price series in the respective markets for varying time periods between 1971 and 1998. They found three stochastic cycles ranging from one year, two to four year, and seven to ten years in the four Asian markets, despite differences in the underlying economic and market structure. The stochastic nature of the cycles also suggests that these markets are highly volatile and their prices are highly susceptible to market shocks.

Next, we have two papers that compare land use and taxation policy and legislations on ownership between two countries. The first paper by Chi Man Hui, Sze Mun Ho and Kim Hin Ho examines the land tenure system in Singapore and Hong Kong and how the governments in these countries have effectively implemented various value-capture mechanisms like property tax, stamp duties and land related taxes to build up their resource to fund public works. The pros and cons of the value-capture instruments adopted in the two countries are compared, and lessons are drawn from each country’s experience. The second comparison paper by Richard Tan looks at the legislative restrictions on the foreign ownership of property in Singapore and Indonesia. Some creative ways of circumventing the foreign ownership of property in these countries have been practiced. However, these arrangements would be considered illegal and would not be enforced, despite the fact that two different families of legal system are adopted in the two countries: the civil law system in Indonesia and the common law system in Singapore, under the two different legal systems.

The last paper by Euehun Lee and Karen Gibler looks at the senior housing issues that are very specific to the Korean housing market. The ageing of population, the economic and cultural changes have created new demand for senior housing in Korea, compared to the traditional co-residence arrangement with adult children. A survey of urban South Korean aged 50 and older indicates that there is growing interest among the respondents with higher income and healthy to consider full-cost senior for more independency and privacy in their living. They are also prefer senior housing that provides personal care, home care, social and security services without the financial and physical maintenance of a traditional home. This paper provide a different flavor on housing market changes in South Korea, an experience that is not fully similar to the senior housing residents in the Western countries.

In summary, this special issue on “International real estate” has put together papers that reflect the diversity of real estate issues that is of research interests in different countries. They also highlight significance of the globalization of real estate market place and how institutional investors allocate their investment funds into the real estate asset. This field is still an evolving one, but at least, we hope that this special issue would serve as a catalyst for further international real estate research.

Tien Foo Sing and Seow Eng OngGuest editors