RELATIONSHIPS BETWEEN PROPERTY STOCKS AND OFFICE PROPERTY PRICES OF SINGAPORE, HONG KONG AND KUALA LUMPUR

Abstract

Real estate investments, namely direct real estate assets (properties) and property stocks, are widely included in modern investment portfolios. In seeking diversification benefits, international investors even include real estate investments from the Asia Pacific countries. Office real estate assets are often highly invested, and most listed companies own substantial amounts of office properties. The trend of international diversification and the relative importance of office properties in investment portfolios provide the impetus for this study to investigate the structural price linkages between the office sub-market and property stocks in the three key Asian cities of Singapore, Hong Kong and Kuala Lumpur. Office property price indices and property stock indices for Singapore, Hong Kong and Kuala Lumpur for a ten-year period, from the third quarter of 1993 to the second quarter of 2004, are collated and examined. Property stocks exhibit low correlation with the office property markets that highlight the diversification benefit. However, Kuala Lumpur property stocks exhibit strong correlation with the Hong Kong office property market.

Singapore property stocks lead the office market by up to four quarters and the finding is similar for Kuala Lumpur. The property stocks and office property market for Hong Kong do not reveal any lead or lag relationship. Thus, the property stock markets are on the whole more efficient than the office property markets. The Singapore property stocks are found to lead both the Hong Kong and Kuala Lumpur stock markets by up to one quarter. The Hong Kong office property market is found to lead the Singapore and Kuala Lumpur office property markets by up to two quarters.

The Dickey-Fuller and Augmented Dickey-Fuller tests validate that all the property stock and office property price indices are stationary in their levels, implying weak-form efficiency. The cointegration tests validate that the responses of the property stocks are more significant owning to price shocks in the other indices, and is attributable to the volatile nature of the property stocks. The office property markets of Singapore and Hong Kong exhibit more significant responses as compared to that of the Kuala Lumpur office property market. In addition, the variance decomposition tests validate that the Singapore property stocks have contributed most significantly to the forecast error variances of the other price indices. In addition, the Hong Kong property stock and office property markets are highly subjected to external price movements in the other markets.