INTERACTIONS BETWEEN SECURITISED AND DIRECT REAL ESTATE RETURNS IN SINGAPORE

Abstract

The strengthening of Singapore’s real estate market has garnered interest in exploring the issue of price predictability and price discovery in the securitised real estate market and the direct real estate market. This study adopts the Granger Causality test and correlation analysis to analyse the direction of causality as well as the lead-lag relationship. Prior to these tests, the augmented Dickey-Fuller test and Johansen cointegration test are essential to determine stationarity of the returns series and also cointegrating relationships between the markets. This study segregated the direct real estate market into residential and commercial sectors. All three return series were found to be stationary at I(1), and cointegration was present between securitized and direct residential, and securitized and direct commercial real estate. Presence of cointegration then warrants an error correction term to be included in the Granger Causality model. Values of the adjusted R2 suggested that the models employed were a good fit and Durbin-Watson Statistic showed that the residuals in the models had low autocorrelations, thereby increasing the accuracy of the models. Correlation analysis found strong contemporaneous relationships between securitized and direct residential and securitized and direct commercial markets. Strong correlations were also found when securitized market led by a quarter. In relating the results obtained to the research questions, this study concludes that predictability of prices is possible given the lead-lag relationship. As such, price discovery occurred faster in securitized market, and its returns indeed Granger caused direct real estate returns.