LIQUIDITY PREMIUM FOR COMMERCIAL REAL ESTATE IN SINGAPORE

Abstract

An asset's liquidity is an important driver of its value. However, liquidity and liquidity premium studies in real estate are few because real estate is a local asset, with limited data availability, and a specialised investor base. Understanding liquidity in commercial real estate is increasing in importance because of the financialization of real estate through Real Estate Investment Trusts (REITS), Environmental, Social and Governmental (ESG) concerns, and the changes in space use needs. Importantly, the increase in Additional Buyer Stamp Duty (ABSD) for residential properties are causing investors to turn towards commercial strata properties. This study aims to investigate and estimate the liquidity premium experienced by such properties across the office, retail, and industrial sectors. A hedonic regression model is used to investigate and estimate the liquidity premium from 2013 to 2023. Two measures are used to estimate market liquidity: transaction volume and the Amihud measure. The coefficient of these measures is used to calculate the liquidity premium. This study also attempts to find out if the liquidity premium increases during market downturns and if investors change their perception of liquidity risk during times of turmoil. The results show that liquidity premium measured with transaction volume is the highest for retail at 8.30%, followed by office at 3.87% and industrial at 0.79%. Liquidity premium measured with the Amihud Measure showed that industrial is the highest at 1.03%, followed by office at -2.16% and retail at -2.48%. Liquidity premiums measured by the Amihud measure and transaction volume increased during market downturns.