How does liquidity in the financial market affect the real estate market yields?

Abstract

Purpose

After the Global Financial Crisis in 2008, the impact of expanded liquidity in the financial market has drawn attention. The purpose of this paper is to examine the relationship between liquidity in financial markets and office markets across Asian countries. In particular, the research not only examines the effect of normal liquidity on real estate markets, but also the effects of excess liquidity are specifically highlighted.

Design/methodology/approach

This paper uses panel estimation utilizing quarterly data from the first quarter of 2007 to the fourth quarter of 2015. Taking both time and location dimensions into account allows for a more precise estimate of the relationship between liquidity and office market’s yields.

Findings

Per the empirical outcome, an increasing excess liquidity tends to decelerate the value of office yields in six major Asian office market centers due to the positive effect on commercial real estate value. This effect is also identified by comparing the difference between the level of fitted yields and actual yields.

Practical implications

The results enhance the understanding of commercial real estate yield determinants. Furthermore, the results can be used to assess the impacts of liquidity on major office markets in Asia.

Originality/value

This paper attempts to uncover the impact of liquidity in financial markets on the office market yields. To better understand the relationship, the concept of excess liquidity is adopted and further exploration of each office market is conducted by comparing the fitted yields, which is computed considering the effects of excess liquidity on yield levels and actual yields.

Citation

Kim, K.-M., Kim, G. and Tsolacos, S. (2019), "How does liquidity in the financial market affect the real estate market yields?", Journal of Property Investment & Finance, Vol. 37 No. 1, pp. 2-19. https://doi.org/10.1108/JPIF-03-2018-0020