Commercial Real Estate and Equity Market Bubbles: Are They Contagious to REITs?

Abstract

This paper uses a regime-switching approach to determine whether prices in the US stock, direct real estate and indirect real estate markets are driven by the presence of speculative bubbles. The results show significant evidence of the existence of periodically partially collapsing speculative bubbles in all three markets. A multivariate bubble model is then developed and implemented to evaluate whether the stock and real estate bubbles spill over into REITs. The underlying stock market bubble is found to be a stronger influence on the securitised real estate market bubble than that of the property market. Furthermore, the findings suggest a transmission of speculative bubbles from the direct real estate to the stock market, although this link is not present for the returns themselves.

Cyclical co-movements of private real estate, public real estate and equity markets: A cross-continental spectrum

“…However, results for the US in Glascock et al (2000) and Tuluca et al (2000) suggest that the relationships are complex, with feedback possible from the private real estate market to the REIT sector. A complex and interlinked relationship for US asset classes was also suggested in work by (Nneji et al, 2013) on speculative bubbles. In all these cases, appraisal based series were used for private real estate returns.…”

Monetary policy and bubbles in US REITs

“…For detailed discussions on detection of bubbles in US REITs, see for example,Anderson, Brooks, , and Tsolacos (2011), Nneji, Brooks, , andWard (2013),Escobari and Jafarinejad (2016), and Pavlidis, Yusupova, Paya, Peel, Martinez-Garcia, Mack, and Grossman (2016) for bubbles in international housing markets.3 The decision to use REITs prices instead of housing prices, in this paper at this stage, is primarily because of the fact that, unlike the REITs price index, which is homogenous across the country, housing markets are regional in nature, with tremendous heterogeneity in terms of their response to monetary policy(Gupta and Kabundi (2010);Gupta, Jurgilas, Kabundi, and Miller (2012a);Gupta, Miller, and van Wyk (2012b).4 The TVP-VAR model, not only allows us to accommodate for structural changes, but also model empirically the fact that the overall effect on the observed stock price may change over time as the relative size of the bubble changes, since changes in interest rates have a different impact on the fundamental and bubble components.…”

The Insight Diversification Characteristic of Real Estate Security in Capital Market under Sharpe’s Asset Class Factor Model: The Case of Thai Property Funds

“…Boudry, Coulson, Kallberg, and Liu [12] uncover the existence of the long-run relation between REIT and real estate investment return so do Hoesli and Oikarinen [13]. Nevertheless, many studies, such as the study by Nneji, Brooks, and Ward [14], indicate that REITreturn is influenced by stock market more than property market.…”