LIQUIDITY AND ITS DETERMINANTS: A COMPARISON BETWEEN S-REITS AND PROPERTY SECURITIES

Abstract

Liquidity is an important characteristic of any security but however, there is a lack of research on the liquidity of Singapore’s Real Estate Investment Trust (S-REITs). As such, this paper studies S-REIT liquidity and identifies the determinants of its liquidity. A comparison is also made between S-REITs and property securities, to examine if they exhibit similar liquidity behavior. Liquidity is quantified using four liquidity measures: the bid-ask spread, the Amihud ratio, the dollar volume and the trading frequency. Since the S-REIT market has grown exceptionally the past decade, we expect rising liquidity. This paper shows that there is no clear improvement in liquidity from 2003 to 2012 as liquidity declined during the global financial crisis period and that the S-REIT market is still on its way to recovery. Only the “tightness” aspect of liquidity improved, but not the “depth” component of liquidity. When a comparison is made with property securities, S-REITs have better liquidity, employing the four liquidity measures. This paper also investigates the significant factors that affect the bid-ask spreads of S-REITs and property securities, employing Stoll’s bid-ask spread empirical model. The bid-ask spreads of S-REITs and property securities are found to be influenced by share price, market capitalization and volatility of returns. The term of trading is also a determinant of S-REIT liquidity, but not for property securities. Finally, the liquidity of property securities is found to be influenced by trading volume and trading frequency, but not for S-REITs.