Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
The role of property in the capital markets
Capital markets have an important impact on the real estate market in terms of its pricing, availability of money and financial engineering. Low interest rates give rise to excess liquidity that helps to cause asset price inflation. Real estate has not been immune to this financial accelerator effect. On the upside, real estate benefited from capital value growth. The downside is now being felt in the west. Capital markets through the credit crunch and liquidity crisis is providing important pointers as to the pricing of real estate in these markets.
It is necessary for us to understand the relationship of capital markets to real estate and how it is demonstrated around the world. The four papers in this capital markets special issue concentrate on its various manifestations from listed to unlisted real estate stocks around the world and how this influences portfolio strategy.
The first paper by Zhou and Lai investigates if investors herd or perform positive feedback trading differently in Hong Kong securitised real estate investments. Focusing on two separate portfolios respectively made up of property stocks and non-property stocks, they find a persistent and significant smaller herding in the property stock sample. Moreover, recent announcements of an increase in short-term interest rate have an additive effect on the herd behaviour of market participants in trading property stocks. Although investors do not have distinction in positive feedback trading, the price impacts on property stocks are stronger and faster after events. Their study therefore concludes that investors have biased behaviour on property stocks.
The second paper by Corgel and Gibson looks at real estate private equity by analysing the role of equity in US unlisted REITs. It finds that there is a structural flaw in private equity funds targeted to small-unit investors as it appears to economically disadvantage investors in favour of sponsors. The paper looks at the advantages and disadvantages of the products in the sector and suggests ways in which some of the disadvantages can be eliminated.
The final academic paper is from Africa and, here, the authors look at investment characteristics of in real estate securities in the Nigerian Stock market and, in particular, the performance of the real estate investments. Interestingly, their findings suggest that real estate securities do not provide a good substitute to direct real estate investment in emerging markets.
Finally, the practice briefing paper by Hoesli and Lekander provides a good background to unlisted European real estate vehicles whose range and depth have expanded over the past ten years. The paper explores the benefits and risks of these vehicles being incorporated into one’s investment strategy whether it is on a European domestic or international scale. The combination of direct and indirect routes offers for a wider range of real estate strategies that is now being applied.
Karen Sierack, Kim Hiang LiowGuest Editors