MODELLING THE RELATIONSHIP BETWEEN COMMERCIAL PROPERTY VALUES AND KEY MACRO-ECONOMIC VARIABLES

Abstract

This research seeks to examine the role of commercial property in the Singapore economy and to quantify its importance. Commercial real estate is a significant and essential component of our nation's economy. In 1995 alone, the total value of commercial real estate was estimated at $125 billion dollars. This was almost equivalent to the Gross Domestic Product. Commercial property and investments in them, make an important contribution to GDP and play a key role in investment decisions. Both as an important component of investment itself and as a main collateral for loans to company to finance investment. The significance of commercial real estate is magnified further when we consider that a portion of the value of the stock market is derived from the real estate corporation owned. This study uses quarterly data from 1979 to 1995 to develop a simple system of two simultaneous equations to quantify the relationship between commercial property value and five major macro-economic influences, i.e. Commercial property value = f{GDP, Interest rates, Inflation, Loans, Total value of shares transacted} Results showed that the macro economic variables were jointly significant in explaining the variation of the commercial property values. Furthermore, to test the result, an ex-post forecast was conducted, and the results were again significant, with low root mean square error. The development of the model should help policy makers and investors understand both the return characteristics of commercial property and its position in our strong growth economy. Furthermore, this model would aid policy makers to realize that major economic policies have far reaching influences into the commercial property market.