LISTED PROPERTY TRUST AND DIRECT PROPERTY INVESTMENT IN AUSTRALIA - A COINTEGRATION APPROACH

Abstract

Listed Property Trust is a significant and essential component of the Australian economy. As Listed Property Trusts can be traded immediately on the stock market, it represents the liquidity in the real estate which provides the diversified (and possibly inflation-hedging) benefits required by the investors. However, in recent years, there has been an emerging school of thought that Listed Property Trusts in Australia have taken on characteristics more indicative of direct property. This means that Listed Property Trusts may not be a suitable vehicle for diversification of investment in property. Hence, this study explores the possible linkage between the indirect and direct property investment over time. Cointegration tests are done on data comprising half-yearly total return indices covering a fourteen-year period (from the second half of 1984 to the second half of 1997). This attempts to establish a long-run contemporaneous relationship of Listed Property Trusts and direct property investment in Australia. The Engle-Granger residual approach was performed to test for a cointegrating relationship. In view of the several drawbacks of the residual test, a more rigorous cointegration test, the Johansen's Full Information Maximum Likelihood approach, was also conducted. This study concludes that the total returns of Listed Property Trusts in Australia and the direct property investment in Australia have a long-run equilibrium relationship. Therefore, the performance of this indirect property market will move together with the direct property market over long periods. This indicates its unsuitability in diversification strategies for investment in property.