LINKAGES BETWEEN COMMERICAL REAL ESTATE AND PROPERTY STOCK PRICE CYCLES IN SINGAPORE

Abstract

Whilst commercial real estate prices and property stock prices in Singapore have experienced cyclical movements in the past years, little is known of the features of these cycles and their relationships. Using the Urban Redevelopment Authority (URA) commercial property price index and Stock Exchange of Singapore (SES) all property stock price index over a period from 1975 to 1997, this study explored these issues extensively. Previous studies in the literature suggested that cycles in commercial real estate market are mainly caused by the time-to-build problem of buildings as well as changes in business conditions, and that stock market cycles are generally attributable to variations in the performance of the economy. A review of the Singapore commercial real estate and property stock market dynamics showed that Singapore is no exception. The review also provided some practical evidence that there was a tendency of co-movements between the quarterly prices in the two markets in Singapore over time. The features of the price cycles were investigated using both time domain and frequency domain analyses. It was found that in the last 23 years, commercial real estate prices have exhibited a strong 30-quarter long cycle and a weak 10-11 quarter short cycle, and that property stock prices have experienced similar cycles, albeit with the short cycle being dominant. The two prices were found to be procyclical to each other, with property stock prices leading commercial property prices by approximately one quarter. Further cross-spectral analyses indicated that the two price cycles are not only closely related to each other, but also closely related to the business cycle in Singapore. The 'data generating processes' (DGP) of the two prices were examined via univariate ARIMA technique. Empirical evidence showed that commercial real estate prices have followed an ARIMA(0, 1, 2) process in the past two decades, while property stock prices followed an ARIMA(0, 1, 1) process. The similarity in the DGPs (both are one order difference stationary MA processes) indicated the presence of linkages between the movements of the two prices. Meanwhile, the difference in the DGPs (that property stock prices have less memory of the past shocks than commercial real estate prices) suggested the fundamental differences in the mechanisms of the two markets. In order to explore the long-term relationships between commercial real estate and property stock prices, Johansen's cointegration technique was employed. It was found that although the two prices had moved in tandem in some occasions, there was a lack of long-term equilibrium relationship between them. However, in a larger system, the two prices were found to be cointegrated with some other economic variables, viz. The financial, service business and commerce GDP, the prime lending rates, and the commercial space supply. This showed some evidence that both the prices are exposed to the macroeconomy, and interact with each other in a macroeconomic setting. Based on the long-term cointegration equilibrium, a structural ECM model was further developed to explore the short-term relationships between the two prices. The results showed that the error correction mechanism plays an important role in adjusting deviations of the commercial real estate price from the equilibrium path, and changes in the performance of the commercial real estate and in interest rates have direct impacts on the property stock price.