EQUILIBRIUM IN THE SPACE, ASSET AND STOCK MARKETS FOR COMMERCIAL REAL ESTATE

Abstract

There has been very limited literature conducted on the linkages between the three dominant but separate real estate markets: the space market, the asset market and the market for property stocks. Also, no research has explicitly assessed the causal relationship between them. Thus, this study applies Corgel (1998)'s model, which is an extension of Fisher, Hudson-Wilson and Wurtzebach (1993)'s model of real estate space and asset markets, to investigate the linkages between the space, asset and traded real estate securities (i.e. property stock) dimensions, using Singapore office real estate sector as a case study. It will also attempt to examine the empirical relationship between movements in rental values (space market), capital values (asset market) and property stock prices (stock market) from 1988Q1 to 1999Q2. In the theoretical framework, rents, asset prices and the share prices of public property companies should align with each other in long-run general equilibrium. However, in the context of the Singapore office real estate market, equilibrium between the three dominant markets had not been observed. The empirical analysis found tha; based solely on return comparison, property stocks offered no significant advantage oveofifice property and property stock prices were historically more volatile than real estate prices. Finally, the results over the full period showed some evidence of the stock marke leading the asset and space markets. The asset market in turn led the space market However, the causality structure changed over the whole period on a rolling basis of five years.