DETERMINING THE PRICE ELASTICITY OF DEMAND FOR SINGAPORE PROPERTY STOCKS

Abstract

This dissertation examines the impact of Real Estate Investment Trust (REIT) initial public offerings (IPOs) on Singapore property stocks and if REITs are substitutes, what are the determinants of the cross elasticity between REITs and property stocks. I adopt the model used by Loderer et al,(1991) by carrying out an event study using a window period of 90 days before the listed date of each respective REIT IPO. Evaluations are done by studying the introduction of REITs into the Singapore market and how this introduction has affected the prices of property stocks in Singapore using a cross elasticity concept. The main focus is on the relationship of this cross elasticity of property stocks and REITs and the traditional determinants of the bid-ask spreads for property stocks, which are the earnings per share (EPS); returns on equity (ROE); volume of shares outstanding (VOL) and returns variance (VAR). There are statistically significant results that prove close relationships of EPS and VAR with the cross elasticity of property stocks and REITs. This relationship is likely to be attributed to the similarity of REITs and property stocks, owing to the fact that REITs are essentially subsidiaries of property firms, set up with the intention of raising funds for the parent firms. As such, prices of the parent firm stocks could be affected by these REITs. With REITs being introduced into the market, and its subsequent treatment as a possible substitute for property stock, this has caused an arbitrage effect to take place in the market as explained by Scholes (1972).