THE LONG RUN EQUILIBRIUM RELATIONSHIP BETWEEN DIFFERENT REAL ESTATE SECTORS: AN EMPIRICAL INVESTIGATION

Abstract

The study attempts to determine whether long term equilibrium and causal relationship exist between the four real property markets; retail, residential, industrial and office. The study was generally conducted for three time periods; 1987-2007, 1987-1996 and 1997-2007. The Johansen technique of cointegration was adopted to test for the existence of long term contemporaneous relationship between these variables. Thereafter, a vector error correction model is applied to quantify short run deviation from their equilibrium state. The bivariate cointegration test between the different variables for the three time periods revealed that there is cointegration relationship between industrial property prices and retail property prices during the full period and the sub period of 1997-2007. The result in the sub period 1987-1996 suggests that there is cointegration relationship between office property and industrial property. Following that, a multivariate cointegration test was carried out. The full period test result reveals that office property prices have cointegration relationship with the other three sectors. Lastly Granger causality test result reveals that there is a causal relationship between the four variables. As cointegration relationship exist between the four real property sectors, lesser gain in risk reduction can be achieved through diversification. As such, policymakers and investors should be cautious about the reduction in diversification when making policy changes and investment decisions.